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The Final Nail in the Coffin of Voodoo(doo) Economics

May 20, 2010

My blogger-buddy Moe over at ‘Whatever Works’ posted some interesting statistics on the national debt recently which demonstrated beyond a shadow of a doubt that notwithstanding three decades of hyperactive bloviation that Democrats are profligate spendthrifts and only Republicans could be trusted to contract-with-America for prudent stewardship of the economy, it was Republican administrations which reliably increased the national debt and Democratic ones which reduced it.

Her chart is indescribably delicious for its value in calling “bul*sh*t” on one of the favored memes of those entitled and irresponsible baby boomers who, raised on the artificially-sweetened mother’s milk of Reaganism, first hijacked and then perverted the word “conservative” (there’s nothing conservative paying for tax breaks by running up debt). But its higher value is that it puts a bullet in the brain of the notion that so-called “free market” policies create wealth. Funding an economic expansion by stealing from future generations may make the current numbers look good, but it has less than nothing to do with creating real, sustainable wealth. If those numbers demonstrate anything at all, it’s that the Republicans have about the same propensity for cooking the nation’s economic books as they do for lying our way into war. But “unleashing the power of the marketplace”? Easy enough if you can subsidize it with mountains of debt.

The guys who ran Enron and WorldCom went to jail for similar shenanigans, and if there is a god, perhaps he’ll demonstrate his existence by arranging the same thing for the geniuses at Goldman Sachs.

To round out the picture, let’s deconstruct a bit.

In 1980, Ronald Reagan campaigned by capitalizing on a confluence of ugliness. A few of the political dynamics that were at play in that election were the shattering of trust between government and people that resulted from the twin insults of Viet Nam and Watergate; the economic disruption caused by shock in oil prices that OPEC used to punish the US for its support of Israel; the rage of southerners at their having been “betrayed” by LBJ’s Great Society policies; the ascendance of form over substance engendered by the shift from print to electronic media; and Jimmy Carter’s woeful deficit of leadership skills, all conspired to create a perfect opening. His message-cum-political-theatre was that “the government doesn’t solve problems, it is the problem.” In order to sell that little slice of unreality, he and the cadre of Satan’s little helpers that constituted his political handlers re-wrote the history of post-war America. Rather than the New Deal having succeed in keeping the U.S. from joining Europe and Asia in their depression-driven slide into toxic economic and social structures (Communism and Fascism being two sides of the same anger- and deprivation-driven coin), the story went that the structures which had successfully protected nearly three generations of Americans from the ragged edge of capitalist practices, and which had fostered four decades of the greatest increase in health, well-being and access to opportunity ever seen by any group of people in the entire history of humanity, were characterized as the framework for some sort of inhuman, freedom-killing gulag.

The American people, who, as a group, have never shied away from the kinds of dark-forces, conspiracy-theory explanations that keep them from having to take a quick look in the mirror, ate it up. Reagan was swept into office on a veritable ocean of smoky torches and sharpened pitchforks, and the nation slapped itself wholeheartedly on the back for having collectively repudiated the notion that, as Carter succinctly and suicidally observed, the myth of American exceptionalism might benefit from a second look.

Embedded in Reagan’s anti-government message was a promise. Or, to be more precise, a bribe. The oldest bribe in electoral politics: vote me in and I’ll cut your taxes. He called it ‘starving the beast’, and as handy a mental picture as that may have provided, it also had the virtue of being brilliantly unspecific. Beasts certainly sound frightening enough, and nothing makes red-blooded Americans man the barricades with more alacrity than a scary monster. But while a few beasts do, indeed, go bump in the night, most are, in fact, of the “of burden” variety. That is, they pull plows, give milk or meat, or make other valuable contributions to the ecosystem. So while we may notice their smell or their untidy habit of crapping in inconvenient places, only a moron would argue for ridding the world of them. Or so one would like to think (sigh…)

In point of fact, far from being the problem that Reagan’s electoral rhetoric demanded, government is, as Keynes’s work demonstrated in the abstract and FDR’s policies proved in practice, a critical constituent of the overall demand structure. Starving it would cut the income of millions of people…no…taxpayers. No, that’s not quite right, either…voters! Yup, that’s the important one. Voters. Sure, you could dream up the occasional mythical Cadillac-driving welfare-queen to toss at the rabble, but even if you did somehow manage to buy the notion that pulling the bottom out from under the most desperate segment of society made great sense in the grand scheme of things (nothing could POSSIBLY go wrong there, could it?), there were just never sufficient numbers to be had in the ghettos to move the needle. Really starving the beast would require cutting defense spending and farm subsidies and social security and Medicare and a bunch of other programs – some arguably good and some arguably bad, but all sitting in Congressional districts – upon which all those important voters had come to feel dependent (or entitled…same thing, really). People may be easily swayed by the rhetoric of ‘the-enemy-within’ (Hermann Goehring demonstrated that point quite handily!), but they wake up from the reverie PDQ when their bellies start to grumble. Cutting federal expenditures in any meaningful way would be the political equivalent of a taking a dull, rusty knife and slowly through one’s own delicate nubbins. Jimmy Carter might have been stupid and idealistic enough to throw it all away on such foolishness, but not Ronnie. He was, after all, the Great Communicator, and it was ‘Morning in America’. So much sun-filled day left to enjoy – how could you possibly spoil it by making hard choices and dealing with reality?

Lucky for Ron-bo, Along came David Stockman, “uncle” Milton Friedman, and the Kids from Chicago, who handed him the perfect tonic in a collection of policy prescriptions that came to be known by serious thinkers variously as trickle-down-theory, Reaganomics or voodoo – voodoodoo, as I’ve always thought of it – economics.

The core premise of Reaganomics was that cutting taxes (at least at the upper echelons of society) would simultaneously starve the government (government: BAD!) and free-up capital which would create a cascade of investment. That investment would then trickle down and eventually bathe the masses while simultaneously raising all boats. Or some such magical thinking (a/k/a “bulls**t”).*

According to this re-tread of ideas that have been repeatedly discredited throughout American history (most recently by the two Roosevelts – Teddy by busting the trusts and FDR in the regulatory reforms which accompanied the New Deal), taxes, rather than being turned right around and spent (which they are), disappear into a black hole which sucks, vampirically, at the nation’s life-blood. This, they tell us, depletes the capital base and strangles investment. Much better for the government to fulfill the wisdom of Ecclesiastes – “cast thy bread upon the waters and you shall find it after many days.” In the through-the-looking-glass world of Reaganomics, this meant that increased economic activity would create more taxable movement of money, and actually increase revenues [ironic aside: the biblical reference is generally interpreted to be a call to charity, an appeal to self-interest which made a lot of sense at a time in history prior to when Christian sensibilities connected the act of giving to the divine spirit. Reagan’s social and economic policies were predicated on the strange idea that selfishness would magically make everyone rich, and therefore charity obsolete. A rather anti-Christian concept, eh? But I digress].

The ‘voodoo’ in this economics is the notion that that if you shove more cash into the economy the result will automatically be greater investment. This ignores the fact that investment follows demand; simply having more money sloshing around creates inflation. But we’ll get to that in a bit [author’s note: actually, in Part II of this piece].

Having successfully affected the bait & switch of promising to cut taxes but really only doing so for the fat cats, the Reaganites were still faced with the problem that any meaningful cut in government spending would exacerbate the recession they’d promised to eradicate. Even after they nibbled at the edges – funnily enough, generally only those edges that affected the most disadvantaged members of society, who tend to vote Democratic – deficits abounded. And abounded. And abounded.

Here’s the ugly little truth about those deficits. As Moe’s chart shows, and as is also aptly demonstrated here, Federal budget deficits ranged from between a low of 2.5% to just below 6% of GDP from 1980 to 1992 (the Reagan/Bush years, which for the purposes of this discussion amount to as a single policy period), averaging somewhere in the high 4% range. During the same period, US GDP ranged from shrinking by 1.9% (1982) to growing at 7.2% (1984, which was the height of the rebound from the second dip of the famous double dip recession. In fact, the numbers clearly show that the second dip was caused almost entirely by the reduction of the deficit spending).

The biggest explosion of both of these numbers was 1983-1986, which encompasses both the run-up to Reagan’s re-election in 1984 and the critical mid-term elections fors his second term. When you look at these years, two things jumps out at you: 1) government spending surged during the election cycle and 2) the Federal budget deficit was the real driver behind the “Reagan miracle” That’s right, when you remove deficit spending from the equation, the US would have been in something ranging from a deep recession/depression to the same economic malaise that killed the Carter presidency for nearly the entire time that Reagan was in office. The only difference between Carter and Reagan/Bush was that the Republicans put the economy on the steroids of deficit-fueled government expenditures.

Coming up: How Reaganism destroyed a generation of capitalists.


* To pre-empt all of those of you hanging out in the peanut gallery in gotcha-ville, any effort to suggest that the New Deal – or, for that matter, Obama’s stimulus package – is no different would torture logic. Deficit spending is one thing in the middle of a crisis; doing it to engineer an economic fiction is another. Bear in mind, also, that both of those crises were caused by the wretched mis-management of the immediately preceding Republican Administrations – specifically, their heinously incompetent handling of the policy tools which reside in the office of President – supports my analysis, and would put anybody who tried to draw the comparison into a rather tight little box. So, my friends, shut yer traps before your feet fill ‘em up.

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4 Comments leave one →
  1. May 20, 2010 2:43 pm

    Still a great post my friend! Keep it up.

  2. May 20, 2010 3:12 pm

    Finally an encapsulation of the reality of Voodoo Economics and Supply Side Reaganomics that I can present to the disbelievers and say, see, it’s not just me! The similarities in my talking points for the past twenty years on this matter with those in this article are stunning and right down to the “Satan” in the “Satan’s little helpers” remark, brilliant! Oh and thank you!

  3. May 20, 2010 3:53 pm

    Thanks, Moe & Frank — Very kind words!

    Stay tuned for the sequel, and check back for links from the text (I put it up before I had a chance to go in and link to back-up material).

    Feel free to tell your friends… 🙂

    T.

  4. D.I.D. permalink
    December 10, 2010 6:04 pm

    This is a great article.

    Regarding the collapse of the old conservative brand, it has happened across the Western world:

    – In Canada, we witnessed the implosion of the Progressive Conservative Party in the 1980’s (allowing the Liberals to be without opposition for 13 years) and when the Canadian right finally reconstituted itself as the Conservative Party in the early years of the new millenium, well, it’s economic and taxation policies mirrored that of your ‘Republicans’.

    – In Britain, the rise of Thatcherism in 1979 to the tune that Reagon would later dance to brought about the “war as a popularity grab” problem now infecting the right, and culminating when even the Labour Party under Tony Blair moved away from its traditional left-wing philosophy towards the centre and strong support for the “new” conservatism.

    – The return of a conservative-libertarian faction to control the government of France and the presidency under Nicolas Sarkozy.

    – In Australia, the Labour Party still manages to cling to power, but is slowly but surely loosing ground and support.

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