“It just isn’t going to work, and it’s very interesting that the man who invented this type of what I call a voodoo economic policy is Art Laffer, a California economist.” – George H.W. Bush, Carnegie Mellon University, April 10, 1980
I’m frightened for the United States, and it’s not just because of my disdain for our faux president, Donald Trump. I’m genuinely concerned about what could happen over the next few years.
In the above quote, George H.W. Bush was referring to the plans of fellow Republican and 1980 presidential candidate Ronald Reagan for revitalizing a stagnant U.S. economy. Then, when Reagan won in most of the primaries, his camp offered Bush the vice-presidential position, and the former Texas congressman shut up about economics. In 1980, the nation was in a bad financial situation. The costs of the Vietnam War, coupled with oil embargoes from OPEC nations, had finally taken their toll. Unemployment stood at nearly 10%; the prime interest rate was 21%; inflation was 14%; home mortgage rates were 17%; and the top marginal tax rate was 70%. In the second quarter of 1980, the U.S. gross domestic product (GDP) declined by 8%. By the end of the year, the overall GDP boasted about $3 trillion (in today’s dollars).
With the help of some Democrats in both houses of the U.S. Congress, Reagan was able to generate an agreement that slashed taxes down to 50% on wages, to 48% on corporate income, and to 20% on capital gains. These measures initially jumpstarted the economy. Average citizens had more expendable income, which they poured back into the economy by purchasing many so-called big ticket items, like vehicle and electronics. By 1990, the size of the U.S. economy had grown from $3 trillion to $6 trillion, with roughly 4 million new businesses and 20 million new jobs created. Although the national debt increased from $1 trillion to $4 trillion during the same period, overall revenues doubled.
Reagan’s economic policies were in line with conservative views on taxation: if we give the “investing class” (meaning, the most affluent) generous tax breaks, they will respond by expanding their businesses or starting new ones, which in turn, will create more products and / or services and more jobs. Along with reduced business regulations (“job killers” in conservative lingo), average citizens will have more income, which of course, they will pour back into the economy. Such growth then will expand the tax base; the additional revenue will replace any money lost to the initial tax cuts.
Ask any frustrated project manager and they will tell you that everything always looks great on paper. While Reagan disciples keep championing his financial moves, the reality is that “Reaganomics” didn’t work out as planned. One thing people forget is a little thing called the Garn-St. Germain Depository Institutions Act of 1982, which rolled back financial regulations that had been established by the administration of Franklin D. Roosevelt to prevent further damage caused by the 1929 stock market crash and the ensuing Great Depression. It’s interesting that Bush’s voodoo comment was made at Carnegie Mellon University. Founded by Andrew Carnegie in 1900 as Carnegie Technical School, it merged with the Mellon Institute of Industrial Research in 1967 to become Carnegie Mellon. The Mellon Institute had been established in 1913 by brothers Andrew and Richard B. Mellon who, like Carnegie, were self-made businessmen and titans of early 20th century America. Andrew Mellon served as Secretary of the Treasury from 1921 – 1932, one of the longest tenures for this position. He created the “trickle-down” economic theory by declaring, “Give tax breaks to large corporations, so that money can trickle down to the general public, in the form of extra jobs.”
But Andrew Mellon is also known for a notoriously rotten hands-off policy with the Great Depression. The banks that failed had put themselves in such a precarious financial position, he believed, and thus, they were responsible for extricating themselves from it. It didn’t seem to matter that these bank failures took people’s money with them; therefore, amplifying the effects of the 1929 crash.
Still, President Reagan – like any good fiscal conservative – held onto these beliefs and eagerly signed the Garn-St. Germain bill. That reduced the number of regulations on financial institutions and allowed them to expand and invest more of their customers’ deposits in various ventures, particularly home mortgages. Again, that looks-great-on-paper ideology swung back around to bite everyone when the Savings & Loans Crisis erupted. Between 1986 and 1995, 1,043 out of the 3,234 savings and loan institutions in the U.S. failed; costing $160 billion overall, with taxpayers footing $132 billion of it. It was the worst series of bank collapses since the Great Depression. That led to the 1990-91 Recession, the longest and most wide-spread economic downturn since the late 1940s. I started working for a large bank in Dallas in April of 1990 and saw the S&L crisis unfold in real time.
Nonetheless, trickle-down economics saw a rebirth with George W. Bush, as his administration further deregulated the banking industry and also deregulated housing. Combined with the costs of wars in Afghanistan and Iraq, the U.S. economy almost completely collapsed at the end of 2008. The 2007-08 Recession was the worst economic downturn since the Great Depression. Unemployment reached double digits for the first time since the start of the Reagan era, as millions of citizens lost their homes and their savings. Had it not been for such programs as the Federal Deposit Insurance Corporation (the FDIC, established by Roosevelt), we surely would have plunged into another depression.
Now, with Donald Trump in office, I fear we’re headed for the same morass. On December 22, 2017, Trump signed the Tax Cuts and Jobs Act; the largest overhaul of the U.S. tax code in 30 years. Financial prognosticators have already forecast the act will raise the federal deficit by hundreds of billions of U.S. dollars over the next 10 years. The law cuts individual taxes temporarily, but cuts corporate tax rates permanently. As suspected, the most affluent citizens will benefit greatly, as they experience a significant reduction in their taxes. The rest of us lowly peons may see a tax increase after those temporary provisions expire in 2025.
You know that classic definition of insanity? Doing the same thing over and over, while expecting different results. It’s more like, well, if you keep doing stupid shit, stupid shit will keep happening!
Ignore Russia-gate for a moment and the fact Melania’s side of the First Bed is colder than a Chicago winter. This past week Trump visited the World Economic Forum (WEF) annual meeting in Davos, Switzerland. This is where the most elite members of the business world meet (conspire) with leaders of developed nations to create economic policies and decide what’s best for us peons. Kind of like evangelical Christians often meet to decide what people should see and read. They’ve set themselves up as the righteous few; the ones who supposedly understand exactly what works and what doesn’t and are divinely compelled to bestow such knowledge upon the rest of us.
Trump ran his presidential campaign on the wave of anti-Washington sentiment; appealing to average citizens about reviving a once-lost “Great America” with a variety of clever ruses: ban Muslims, build a wall along the Mexican border, etc. So many people, of course, bought into it. Like Ronald Reagan, Trump was able to tap into that sensitive nerve of everyday angst; spitting out a slew of quaint buzz words to appeal to average folks. He had said he would never take part in a WEF convention. Yet, there he was; leading a parade of those self-righteous few into another kind of revitalization: the Gilded Age.
I doubt if most Trump voters even know what Davos means and how it could impact their lives. Understand, though, that Switzerland is a place where Hollywood celebrities often went for a retreat or a little vacation – code words for cosmetic surgery; long before Phyllis Diller made it openly acceptable. That’s essentially what Donald Trump did this past week. He flew to Davos to tell the world, “America first is not America alone.”
I’m frightened for the United States.
Image: Golden Spike National Historic Site, Utah.