I’m coining a new term today – Extreme Conservative Governance, or ECG for short. I realize ECG is already taken by electrocardiogram, but since they more often use EKG for the same thing, I think they can share.
Extreme Conservative Governance is what seems to be happening in the House of Representatives. Quick simply, it is the process of passing laws and making rules changes that adhere solely to conservative principals, and disregarding any data to the contrary.
Individual income taxes are the perfect example. The ECG plan is to cut taxes on the wealthy to stimulate the economy, but let’s look at what the data show. Ronald Reagan is credited with driving the U.S. economic engine with trickle-down policies. Key to trickle-down economics is to cut taxes on the wealthy so they will spend more and generate growth that will permeate through the jobs market to the rest of the people in the country. It seemed to work in the 1980s. The top income tax rate dropped four times during Reagan’s term from 70% in 1981 to 28% in 1988. That was about a 60% reduction in the amount of taxes paid by the rich. Between 1981 and 1989, gross domestic product (GDP) grew by 31%, or 3.9% per year.
If you just look at that data, you can justify trickle-down economics and tax cuts on the rich, but there is other data to consider.
The 32% tax rate (exactly in the middle of the brackets in 1981, so the Middle Class tax rate) dropped four times to 15% in 1988. The 16% tax rate (low income) dropped three times to 12% between 1981 and 1986 before going up to 15% in 1987. So, it wasn’t just the wealthy who received tax cuts under Reagan, it was everyone. The economy did experience a 3.9% annual growth rate, but was it from the tax cuts on the rich or the tax cuts on the much more populated lower and middle class?
Professor Owen M. Zidar from the Booth School of Economics at the University of Chicago has looked into this question. In his working paper entitled, “Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment,” Professor Zidar extrapolated economic and job growth attributed to tax cuts and increases on the top 10% earners and that attributed to the bottom 90% and bottom 50% earners. The results were dramatic. Tax cuts on the wealthy have statistically no effect on job growth in the two years following the cut, but there is a very strong job creation benefit to tax cuts for the bottom 90% earners and an even stronger effect for the bottom 50%. The same is true for tax increases.
This makes good sense. Lawmakers generally propose tax cuts as a way to improve a sluggish economy, and that is the case with the plans from President-elect Trump and the Republican leaders in Congress. That suggests that the economy is performing at a sub-par level. During tough economic times, more businesses fail and people have to be more careful with their money. Wealthy individuals have enough of a financial buffer to weather the bad times and the extra income from tax cuts is generally saved until the economy shows signs of improvement. Less wealthy individuals, on the other hand, are more likely to lose income during a downturn, and consequently more likely to spend any extra income from tax cuts.
That common sense way of thinking about income and spending, along with Dr. Zidar’s findings, provide powerful reasons to believe that tax cuts on the wealthy during an economic downturn do not stimulate the economy.
But the ECG way of governing is to claim that tax cuts on the rich do improve the economy and lead to job creation, and ignore the facts to the contrary. Why? I suspect tax cuts for the rich are one of the best rewards for a demographic which not only votes consistently Republican, but also donates heavily to Republican candidates and causes. Tax cuts for the wealthy are a payout for loyalty.
And that does not seem to be a very good way to run the federal government. ECG operates with a carrot and stick method of governance in which the traditional groups that lean conservative reap the rewards, and those who are centrist or lean liberal are punished. Not just punished – vilified by Republican leaders and right-leaning media.
For example, the vast majority of Americans who receive food assistance through the SNAP program experience significant challenges to make ends meet. A recent study looked at the correlation between food assistance and crime rates and found a strong connection. Crime rates were lower during periods when food was more plentiful, that is, shortly after the food assistance was made available each month. Food security reduces crime rates.
How has Fox News reported on food assistance programs? They located some surfer dude in California who received food assistance and spent more of his day at the beach pursuing his passion. That was a year or two ago, but I think I heard about that surfer dude a dozen times over a few days (hard to fact check that – I’m on a flight). That is the ECG’s way of vilifying people who are not the constituents of the Republican Party. Find an example of inappropriate use of social safety net programs and blow it out of proportion so many Americans believe 50% of the federal budget goes to waste. If the American people think there is a lot of government waste, then tax cuts for the rich and benefits cuts for the “moochers” are an easier sell.
While all that makes sense, there is a caveat. If President Trump and the Republican controlled Congress are successful in passing tax cuts on the wealthy, there may actually be an improvement in the economy because this situation is different this time. In the past, tax cuts for the rich were during economic recessions and the wealthy saved their money until things improved. While Republicans have been complaining about the economy for President Obama’s entire term, we are actually in the 89th month or so of a recovery. That means that the wealthy will quite possibly invest their windfall right away and GDP growth will accelerate.
Such a response would seem to vindicate the ECG method, but I suspect the benefits would be short-term. This steady growth we have been experiencing for years has meant that we haven’t generated a new bubble – stock market, housing, beanie babies – that will eventually burst and drive the economy into a recession. A turbocharged economy, especially one driven with policies that accelerate wealth inequality, will undoubtedly lead to some bubble getting ready to burst and ruin our day.