The November 10 Republican presidential debate was the first one I watched. Actually, I recorded it and was pretty tired by the time I saw the program. I found myself drifting off a few times and in that drowsy state, I may have missed some of the finer points the candidates were trying to make. The bigger points got through and it’s one of those I would like to address today.
All of the republican candidates want to cut taxes to stimulate the U.S. economy and generate good paying jobs. That, in turn, will help fill the government coffers because those new gainfully employed Americans send some of their earnings to the federal government through income taxes or perhaps, by way of a national sales tax instead. Most, if not all of the candidates also plan to cut government spending. There are a couple similar plans, but for the most part each candidate’s financial advisors have developed significantly different tax and spending programs. The rosy picture that emerges under these scenarios is a nation with a balanced budget, low unemployment, and a small, unobtrusive federal government which allows business to flourish under a republican president.
There are plenty of experts who attempt to figure out the effect on tax collection, government spending and job growth based on the economic programs proposed by the candidates. These experts’ conclusions do not often agree, and that’s where Pascal’s wager comes into play.
Pascal’s Wager comes from an argument Blaise Pascal included in one paragraph in Pensees, a collection of notes and essays from the mid-seventeenth century which dealt with religious and philosophical matters. In brief, Pascal argued that a person should believe in God’s existence not because that existence can be “proved,” but because it is the best bet. For this to make sense, you have to believe in an afterlife and believe that your experience in the afterlife is dependent on whether you believed in God while living (or at least at the time of your death). Accept God’s existence: get eternal joy; reject God’s existence: get eternal damnation.
Put another way, if God exists and you believed this during your lifetime, the rewards are huge; if you didn’t believe, the penalties are huge. If God doesn’t exist, there’s no real penalty whether you believed or not.
So, back to the candidates’ economic proposals to cut taxes and spending. Donald Trump claims his plan would increase U.S. gross domestic product by 6%; Jeb Bush claims 4%. The historic GDP growth rate from 1947 to present is 3.24%. That averages in the post WWII expansion, but not the Great Depression. During George W. Bush’s presidency, the GDP grew at an average rate of 2.1% and for the first 6-1/2 years of the Obama presidency, the growth rate has averaged 1.8%. If you assign the first three months of a president’s term to his predecessor because there’s a delay in how a leader’s policies reverberate throughout the economy, the rates change to 2.2% for Bush and 2.4% for Obama. Recall that these growth rates include what are commonly known as the Bush Tax Cuts enacted in 2001 and 2003 which were designed to stimulate the economy.
Ronald Reagan is known for spearheading the tax reforms of the 1980’s which among other changes, reduced the top tax bracket from 70% in 1981 to 50% in 1982 to 38.5% in 1987 to 28% in 1988. These actions stimulated the economy and generated additional tax revenue, just as the current Republican presidential candidates promise will happen under their plans. I contend, however, that cutting the top tax bracket from 70% would stimulate substantially more growth than cutting it from the current 39.6% rate. It should also be noted that, while the GDP growth rate was better during Reagan’s presidency than during the terms of the presidents before and after him, the rate was equal to the long term average from 1947. Per the Cato Institute, real economic growth averaged 3.2% under Reagan, 2.8% under Ford-Carter and 2.1% under Bush-Clinton.
So, with a nod toward Pascal, what if the Republican candidates’ tax plans do not produce the 4-6% growth they promise. In this case, the rewards and consequences differ from Pascal’s scenario about believing in God. If the executive and legislative branches believe in and enact the tax and spending cuts, and the predictions are correct, the nation’s economy supports a good lifestyle for its citizens. If the predictions are not correct, however, the situation could become desperate. We would then likely experience ever increasing deficits, cuts to the country’s social safety net (food, health, education & welfare programs), increased income and wealth inequality, and perhaps social unrest.
Government spending generates jobs. Since higher income individuals have higher savings rates, changes which benefit the wealthy at the expense of the poor negatively impact job growth. While the wealthy are often referred to as “job creators” – a perfectly reasonable description – the customers drive the demand. A business owner is unlikely to create those jobs if there is little need for their products because cuts in the social safety net have reduced the buying power of the lower income portion of the population. Social unrest would have a similar employment depressing effect. Additionally, once the tax rates are reduced, it is almost impossible to get congress to raise them again. Thanks to gerrymandered districts, the House of Representatives is full of Republican members whose only risk of loosing an election would be to a more conservative challenger. Consequently, those members are very unlikely to ever vote for raising taxes.
There is also a research study performed by the non-partisan Congressional Research Service – an arm of the Library of Congress – and made available to the House and Senate on September 14, 2012. It was withdrawn shortly after its release due to pressure from Senate Republicans (Forbes), and re-released on November 1, 2012, following a letter from the ranking Democratic tax expert in the House, Rep. Sander Levin, in which he asked for an explanation for the withdrawal. Based on 65 years of U.S. economic data, that study concluded that, “The reduction in the top tax rates appears to be uncorrelated with savings, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.” In layman’s terms, cuts to the top tax brackets do not stimulate the economy, do not help people prepare for retirement, but increase wealth inequality. (Report: http://www.dpcc.senate.gov/files/documents/CRSTaxesandtheEconomy%20Top%20Rates.pdf)
To believe or not to believe. Political candidates make promises and, once elected to office, they make excuses for why they were unable to keep those promises. When it comes to economic promises that do not pan out, however, there is a very good excuse to give – presidents don’t have that kind of power. The GDP growth rate the past few years has been tempered by things beyond the president’s control. These include the Greek debt crisis, which in part has weakened the Euro, the war in Syria and the refugees it has produced, the devaluation of the Yen, the drop in crude oil prices, and the slowing of the Chinese economy. On the plus side, interest rates are historically low and it is not difficult to service the nation’s substantial debt at the moment. Also, it’s a great time to take a trip abroad and use our strong U.S. dollars to see the world – if you’re on the right side of the income inequality scale, that is.