Best of Dennis – Economic Theory Versus Practice

Best of Dennis…

Dennis is taking some much-deserved vacation time, and will be back writing soon. This article was posted originally on August 1, 2024, it is still relevant today….

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Friend, Leisa P. asks, “Can you show me evidence that ‘trickle-down economics actually worked?” After some heavy research I realized it’s a much bigger issue.

Yogi Berra explains, “In theory there is no difference between theory and practice. In practice there is.”

I reviewed John Kennedy’s investment tax credits; government attempting to promote economic growth. GDP more than doubled in the following decade.

Supply Side Economics Theory

Ralph Benko writes a first-hand account, Jack Kemp, Tax Reform, And The Way The World Works, explaining the theory, history and result.

Congressman Jack Kemp, citing Kennedy’s tax cuts, was the major force behind the supply-side economic theory. Of course, politics reigned supreme:

“One Kemp insider (reported), Reagan, on the verge of his presidential campaign, came to seek Kemp’s endorsement. …. Jack Kemp offered his endorsement in return for Reagan’s endorsement of the Kemp-Roth 30% across-the-board tax rate cut.

That policy was controversial among both Republicans and Democrats. It was famously attacked by Reagan’s chief rival for the 1980 presidential nomination, George H.W. Bush, as ‘voodoo economic policy.’

Reagan, on the advice of his then-top advisors, reportedly intended to…pocket Kemp’s endorsement, and never mention the tax rate cut again.

Until,…President Carter attacked Reagan’s endorsement of Kemp-Roth as irresponsible. Reagan rose to its defense. Carter doubled down. So did Reagan.

As a result, Kemp-Roth emerged unbidden as Reagan’s central economic policy campaign issue. When elected, Reagan was sort of stuck with it (Kemp would not let it go).

…. Dave Hoppe, Kemp’s chief-of-staff (reported) Jack crusaded…so relentlessly…that other Members of Congress seeing him approaching in a hallway, would bail into a cross-corridor to avoid being buttonholed by Kemp and given a long lecture on how Supply-Side economics would cure the national economic malaise.

Jack’s relentlessness paid off. He slowly but surely built a coterie of supporters, including ambitious Young Turk Congressmen, some destined to ride the Supply-Side wave to higher office: Newt Gingrich, Vin Weber, Connie Mack and the faux-Supply-Sider David Stockman among them.”

Investopedia tells us:

“The Economic Recovery Tax Act of 1981 (ERTA) was the largest tax cut in U.S. history. …. ERTA slashed the top income tax rate and allowed for faster expensing of depreciable assets.

…. The biggest tax cuts were for wealthy Americans, with the top rate cut from 70% to 50% over three years. The bottom bracket was cut from 14% to 11%.”

Political opponents screamed, “Voodoo economics, tax cuts for the rich”, and rebranded it as “trickle-down economics.”

Did the “theory” work?

Ralph Benko quotes a 2011 Peter Ferrara article in Forbes:

“These economic policies amounted to the most successful economic experiment in world history. The Reagan recovery started in official records in November 1982, and lasted 92 months without a recession until July 1990, when the tax increases of the 1990 budget deal killed it. This set a new record for the longest peacetime expansion ever.

…. In 1984 alone real economic growth boomed by 6.8%, the highest in 50 years. Nearly 20 million new jobs were created during the recovery, increasing U.S. civilian employment by almost 20%.”

Adverse Consequences?

Investopedia adds, “Combined with increased military spending, the ERTA contributed to soaring U.S. public debt, which tripled in Reagan’s time in office.”

US public debt continued skyrocketing, now over 120% of GDP.

Theory versus practice….

I boarded a plane in Washington D.C., headed to Los Angeles. I was shocked, Jack Kemp was sitting next to me, the supply-side crusader. I asked him a question. I was willingly buttonholed, receiving a multi-hour lesson from the master.

Kemp saw Kennedy’s success, cutting taxes, allowing the people to keep more of their hard-earned money. They saved, spent, invested, created jobs – all good things.

Politics over the people

I asked about the soaring debt. He explained tax rates were lowered, but the government actually collected more in tax dollars because of the booming economy. Why didn’t the debt come down? He was emphatic! Political opponents did everything possible to insure it would fail, deliberately creating record deficits.

A few years later I found myself next to supply-side advocate, Senator Connie Mack at a breakfast. When he finished his presentation, I asked him a question. Buttonholed again…when we were done, the staff had cleaned off the tables and we were the only two remaining. He was also a willing and excellent educator.

He echoed Kemp’s comments about congressional spending. He pulled out some Bureau of Labor Statistics data about cutting capital gains taxes (tax cuts for the rich….). Reducing capital gains tax rates caused investors to churn their stocks, and government capital gains tax revenue increased.

Why would politicians oppose this; it’s a win/win for the people and the government? Frowning, he explained, – getting elected takes priority over what is good for the people with many politicians. Political reality 2.0.

Reducing taxes gives the population more money to spend (economic stimulus), save and invest. The middle and lower classes would be upgrading their lifestyle and begin to invest. The top 1% would spend more, but also invest more and grow their wealth exponentially.

I couldn’t find data back to 1979, however, the wealth gap has really jumped since the repeal of Glass-Steagall in 1999.

Both explained Reagan understood what was happening. On April 24, 1985 Reagan addressed the nation about wasteful spending and deficits.

“No matter how hard you work, no matter how strong this economy grows, no matter how much more tax money comes to Washington, it won’t amount to a hill of beans if government won’t curb its endless appetite to spend.

…. The big spenders in Congress talk as if all that money they spend just kind of magically appears on their doorstep, a gift from the Internal Revenue Service.

…. There is no magic money machine. Every dollar the government spends comes out of your pockets.

…. It’s our moral duty to make sure that we can justify every one of your tax dollars, that we spend them wisely and carefully and, just as important, fairly.

…. It isn’t fair, and you know it.

…. The time has come to decide what benefits we can properly expect from the Federal Government for ourselves, our neighbors, and those in need; and what government can take from us in taxes without making everyone worse off, including those who need our help. The one thing we cannot do is stay on the immoral, dead-end course of deficit spending.

…. We’ve had only one balanced budget in the last quarter century.

…. What went wrong? Where has all the money gone? Well, during the strong, prosperous Eisenhower years in the 1950’s and through the Kennedy years, we kept spending in check. During those Kennedy years there was a tax cut proposed similar to our cut. It was enacted in 1964, and the economy grew then as it has grown now.

…. My fellow citizens, the time has come for government to make the same hard choices your families and businesses do. The time has come for your public servants to bring spending down into line with tax revenues.”

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Moral theory – immoral practice!

Immoral “public servants” ignored him. Reagan felt by starving Congress of funds, a moral political class would do the right thing and cut spending.

Both Jack Kemp and Connie Mack explained the exact opposite happened, politicians wanted Reagan’s plan to fail. They felt no “moral duty to spend wisely, carefully and fairly.” Leisa, the theory might have worked, but the flaw was assuming “moral public servants.”

The BS continues, thirty-nine years later (2024), “The Senate unanimously approved a resolution calling the debt “a threat to the national security of the United States” and calling expected future budget deficits “unsustainable, irresponsible, and dangerous.”

The current flavor is the Modern Monetary Theory (MMT). Investopedia explains:

“Modern Monetary Theory is a macroeconomic model positing that countries that issue their own currencies, such as the U.S., are not constrained in their spending. Proponents of MMT argue that such countries can’t default on the securities they issue, as they can simply print or issue more currency.”

Friend Chuck Butler explains politicos pluck trillions from their MMT, “Magic Money Tree” to buy votes, ignoring “unsustainable, irresponsible, and dangerous” deficits. History shows MMT works, until it doesn’t, and the economy collapses.

Reagan erred about spending YOUR tax dollars. The huge deficits/borrowing/spending is tax dollars from your children and grandchildren. Politicos spend on a “no limit” credit card, leaving the bill for future generations to pay.

Thomas Sowell suggests, “When the people want the impossible, only liars can satisfy.” There is no shortage of politicians willing to lie for their personal gain.

Leisa also asked about Warren Buffett’s theory – how raising corporate taxes would balance the budget.

Theoretically, Buffet may be correct; but in practice it won’t work. As Reagan said, congress will just spend more, no matter how much the government receives in revenue.

What’s the real issue?

Thomas Jefferson explains:

“The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

“The policy of American government is to leave its citizens free, neither restraining them nor aiding them in their pursuits.”

Leisa, no economic theory will work until a moral, responsible legislature spends wisely and fairly. Argentina is currently fighting through the process.

An angry generation, stuck with the bill will redefine the role of government; it won’t be pretty.

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Quote(s) of the Week…

“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.” — Thomas Sowell

“The idea that even the brightest person or group of bright people, much less the U.S. Congress, can wisely manage an economy has to be the height of arrogance and conceit.”
— Walter E. Williams

“It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes.”
— Andrew Jackson

And Finally…

Lifelong friend Tom G. shares some political quotes. Some are funny, many are true:

• Those who are too smart to engage in politics are punished by being governed by those who are dumber. — Plato

• Politicians are the same all over. They promise to build a bridge even where there is no river. — Nikita Khrushchev

• Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel. — John Quinton

• A politician is a fellow who will lay down your life for his — Texas Guinan.

• I have come to the conclusion that politics is too serious a matter to be left to the politicians. — Charles de Gaulle

• Instead of giving a politician the keys to the city, it might be better to change the locks. — Doug Larson

• I have come to the conclusion that one useless man is a shame, two are lawyers and three or more are the government. — John Adams

• Suppose you were an idiot. And suppose you were a member of Government. But then I repeat myself. — Mark Twain

• I don’t make jokes. I just watch the Government and report the facts! — Will Rogers

• I contend that for a nation to try and tax itself into prosperity, is like a man standing in a bucket and trying to lift himself up by the handle. — Winston Churchill

• A Government which robs Peter to pay Paul, can always depend on the support of Paul! — Will Rogers

• The problem we face today is because the people that work for a living are outnumbered by those who vote for a living. — George Bernard Shaw

And my favorite:

• Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other. — Oscar Ameringer

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

 

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