Wednesday, January 21, 2015

The Reagan/Bush Deficits Continue

The Reaganistas still believe (or pretend to believe) that cutting taxes will spur so much economic growth that tax revenues will actually increase.

You'd think that the "tax cuts bring in more revenue" myth would have been exploded by the experience of Gov. Brownback of Kansas.  He followed the Reagan playbook, and cut taxes while assuring the cuts would result in an economic boom.  We have seen what happened

Here's how Kansas Republican legislator Don Hineman describes the state's budget problem:
"But think about this: the entire budgets for public safety and general government could be eliminated and we still would not have eliminated the $648.3 million budget deficit for fiscal year 2016.  The budgets for all elected statewide offices and cabinet-level departments could be eliminated, all legislative functions be defunded, highway patrol and KBI abolished, and all state prisoners let out on the streets, and we still would not have totally eliminated the hole in the budget."

Tax cuts increase revenue? Hahahaha!.

But - but - but Reagan, reply the ideologues.

Yes, revenue increased under Reagan, but the increase came despite the cuts, not because of them. (Post hoc ergo propter hoc is a common logical fallacy.)

The revenue increased for two reasons.

Firstly, Reagan came into office when the economy was depressed as Volcker was squeezing the economy to reduce inflation.  So once Volcker removed the screws, the economy took off from its depressed 1980 baseline - a growth that was going to happen anyway without the Reagan tax cuts.  So yes - the increased economic activity brought in a certain amount of tax revenue, even when the rates had been cut.

But a more significant source of increased revenue came from the increase in government spending - largely spending on unproductive military toys. This increased spending (mostly borrowed) translated into people's incomes, a proportion of which came back as taxes.  So a big part of the much-touted Reagan revenue increase came from borrowed money.

This may be hard to follow in the abstract, so let's make it concrete.  If the government spends $1 million that's unfunded, that $1 million becomes income for corporations and individuals out there in the workplace.  They will pay taxes on that new income - let's say 25%, so $250,000 comes back to the government, and voila! - an increase in revenue of $250,000.  Except that the government is out $750,000 to get that $250,000 back.

That's the story of the 1980s revenue increase - a lot of it was essentially borrowed money as Reagan and HGW tripled our national debt with irresponsibly low tax rates. If taxes had not been cut so much under Reagan, the economy would still have boomed when the Fed relaxed interest rates, but not at the expense of such heavy borrowing.

These low rates (only slightly ameliorated by Clinton) have persisted, meaning that we've had constant borrowing since the 1980s. (There were a couple of Clinton surpluses, but they arrived only as a result of the tech bubble - the underlying underfunding continued.)  Then GW made things worse by more irresponsible tax cuts, whose full disastrous effects were masked by the housing bubble.  Once the housing bubble collapsed, and the economy went into freefall, we started seeing the full effects of the Reagan/Bush tax cuts.

Which is why blaming the resultant deficits on Obama is disingenuous and intellectually dishonest. They are still the Reagan/Bush deficits.

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