A One Man Think Tank

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 89^th 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.

Nissan and their suppliers employ about 30,000 people in the English city of Sunderland. Before the Brexit vote in June 2016, voters were warned about likely economic damage from a “Leave” campaign victory. The “Yes” vote won and 61.3% of Sunderland’s voters joined the winning side.

The negotiations over the EU-U.K. breakup, including import tariffs, have yet to begin, but goods produced in Great Britain will most likely cost more when sold in EU countries. That is bad for Nissan’s Sunderland operations and probably bad for the residents of the city since many could find themselves unemployed or underemployed. Hoping to prevent large job losses, the U.K. government has pledged to help Nissan “remain competitive,” but at this point, no one knows exactly what that means. Because of the vote to leave the EU, which was supported by more than 60% of their voters, Sunderland will likely end up with higher unemployment, lower average wages, and higher government spending to help mitigate the likely tariffs Nissan will face.

And then there’s the U.S. presidential election. Democratic strategists were baffled when 77 of the 100 poorest and more government-dependent counties in the country voted for Mitt Romney in 2012. The results from the 2016 presidential election show that they haven’t figured it out yet. Shouldn’t people who receive a lot in government benefits vote for those lawmakers who support such programs? For about three-quarters of people in the poorest communities, the answer is no.

Karl Marx is known for his quote about religion being the opiate of the masses. Marx believed that religion acted in a similar manner to how opium affects an injured person. Religion can provide some immediate relief and present pleasant images of the future for those who suffer, but it can also lull people into a willingness to accept the status quo: capitalism and the cruel treatment of all but the fortunate few. For Marx, religion was a tool used by the fortunate to keep the masses in their unpleasant place.

Don’t get me wrong. I am a capitalist, but one who believes in social safety net programs to ensure that the disadvantaged do not fall through the cracks. The wonderful thing about the post-World War II United States is that economic growth allowed for the formation of a strong middle class and social safety net programs helped those in need. There was minimal income inequality and the country thrived. When a system is out of balance, on the other hand, it tends to lead to exactly what Marx was warning about: abuse of the less fortunate by the rich and powerful – the cruelty of capitalism.

This situation of high income and wealth inequality, and attacks on social safety net programs are brought to you by – – – us, the voters. We vote in the lawmakers who make the changes to help the rich and powerful at the expense of the less fortunate, and we often vote against our own self-interests in the process. We may be single-issue voters and vote for someone who will work to cut our benefits because he or she is also the one who claims to protect our guns or unborn fetuses better. In many cases, we vote for whom our pastor told us to because we don’t want to piss off God. There’s that opiate of the masses thing again.

The U.S. tax system has gotten out of whack over the past couple decades. Individual income tax rates were quite high prior to Ronald Reagan’s presidency, and substantial rate cuts were made during his term. A combination of a less burdensome tax structure and the “peace dividend” that followed the collapse of the Soviet Union led to an economic boon during President Clinton’s term, and a budget surplus was achieved during Clinton’s final year.

The tax cuts enacted during the first two years of the G.W. Bush presidency, however, were costly. Republicans wanted to reduce taxes on the wealthy to stimulate the economy – a strategy that data show does not work since the wealthy save the money until the economy shows signs of improvement on its own. In order to sell that tax cut to Congress, they had to reduce individual income tax rates at all levels. As a result, federal revenue was greatly reduced and contrary to promises, spending increased leading to high budget deficits as a percentage of gross domestic product (GDP). The Great Recession followed a few years later, federal revenue dropped more, the deficits increased substantially, and nothing could be done to fix the income tax system because you simply cannot raise tax rates on the poor and middle class during a recession without making it worse.

Congressional Republicans wanted to make the Bush tax cuts permanent, but President Obama held out for a rate increase on top earners. Contrary to Republican predictions, raising tax rates on the wealthy did not send the economy into another recession and Obama has overseen one of the longest economic expansions in history.

But we now have a tax code in which about half of Americans do not pay individual income taxes. GDP per capita is one of the best gauges of the wealth of a state’s residents. The average GDP per capital in the U.S. is $49,844. President-elect Trump has proposed cutting taxes on the wealthy and presumably cutting social safety net programs to pay for it (his plans are not very clear yet). Should such a tax and benefit cut happen, people from states with per capita GDP that is below the national average will likely suffer.

So who voted for whom? Mr. Trump won thirty states plus one of the four electors from Maine with an average per capita GDP of $44,963 (9.8% below the national average). Ms. Clinton won nineteen states plus the District of Columbia and three of the four electors from Maine with an average per capita GDP of $58,008 (16.4% above the national average).

Based on this metric, Mr. Trump’s average voter pays little or no income tax and receives above average levels of government assistance while Ms. Clinton’s average voter pays substantial amounts of income tax and receives below average levels of government assistance. In both cases, the average voter chose the candidate who promised to harm them financially.

It makes you wonder about us voters, doesn’t it?

There were many polls leading up to the 2016 U.S. presidential election and in the vast majority of them, the American people expressed their beliefs that the Republican Party was a better choice to deal with the economy. As an example, participants in the George Washington University Battleground Poll conducted April 17 – 20 of last year chose the Republican Party over the Democratic Party by 53% to 42%. This doesn’t really surprise me because Republicans and right leaning media sources proclaim loudly and often that the democrats are bad for the economy, and Americans seem to be easily swayed by fake news, especially when expressed loudly. I call it Reality TV journalism. If you make the news feel the same as entertainment, people will accept it without verification.

History tells us, however, that the economy does considerably better under Democratic administrations than under Republican ones. Forbes put out an article in September which compared economic performance under different administrations (“Trump Vs. Clinton: Which Party is Better For The Economy?” from September 16, 2016). Here are some interesting findings:

1. If you had $10,000 in an IRA, during the 16 years of Democratic administrations (Clinton, Obama) it would have grown to $72,539. During 16 years of Republican administrations (2^nd half Reagan, H.W. Bush, G.W. Bush) it would have grown to $14,986.
2. All six of the major market crashes happened under Republicans – Hoover, Nixon (twice), Reagan, G.W. Bush (twice).
3. Corporate profits grew 26.8% during Reagan’s eight years (best performance of last three Republican presidents), but grew by more than double that during Obama’s eight years (55.8%).
4. During G.W. Bush’s two terms, 1,348,000 jobs were created while during Obama’s two terms, 10,545,000 jobs were created including the 3,681,000 jobs lost during the last two years of the Great Recession which was began before he took office.
5. At the end of G.W. Bush’s presidency, the budget deficit was 9.8% of the country’s gross domestic product (GDP), while it is now only 2.8% of GDP at the end of Obama’s term.

Those macroeconomic numbers paint quite a picture, but there is a microeconomic situation that has me more concerned and prompted this post.

Most of you likely heard how the Republicans in the House of Representatives attempted to change the rules that govern the next two years in order to eliminate independent oversight of the ethical behavior of lack thereof for members of the House. There was a backlash from the media and public, and Mr. Trump tweeted his rebuke, and House Republicans backed down. The Office of Congressional Ethics retained its independence.

There’s another rules change which was approved this week that breaks from tradition, and the tradition broken is one of fiscal responsibility. The rules change passed with a vote in which all 193 Democrats and three Republicans voted “No.”

As a result of that lopsided vote, any transfers of federal lands to local governments will be considered “cost-free” for the federal government, even if that is not the case.

This is big. Since 2010, the Republican controlled House required that any action that increased costs to the federal government or reduced federal revenue had to be offset by some other action. The goal was to keep the federal budget deficit in check by making sure changes could be fiscally justified. For example, if a new spending program was expected to cost an additional $2 billion, the proponents would have to find cuts to other programs totaling at least $2 billion. Similarly, if a change were to reduce federal revenue by $3 billion, spending cuts were required that reduced spending by a similar number. This was a budget-neutral rule which most of us have to deal with everyday in our personal lives – credit cards excepted.

The recent rule change making transfers of federal land “cost-free” blows that fiscal responsibility out of the water. Transfers are not generally cost-free. The federal government collects money from mining and grazing rights, and other sources, and that is lost revenue. Because the House will now treat these transfers as cost-free, it means that House Republicans are willing to add to the national debt in order to provide favors to their friends and supporters.

Is anyone else worried about this? The primary issue that Republicans have tried to hammer in for years – that they are better for the economy that Democrats – is discarded as soon as Republicans have gained control of both the executive and legislative branches of government.

I think we are in for a rough ride over the next two years. There appears to be no desire on the part of the Congressional leadership to work across the aisle on programs that benefit all Americans. It seems as if Republican ideals – much more conservative ideals than when Republicans last held both non-judicial branches of government – will be shoved through because they can do it.

And one thing that may be pushed through could be tax cuts for the wealthy. If the Republicans are willing to call federal land transfers cost-free, we may use similar “magical thinking” when it comes to tax cuts. For example, you can call a tax cut revenue neutral as long as your projected growth rate for the economy is high enough. Economic experts and the Congressional Research Service may disagree with a high growth rate number, but that will not matter if Congress decides to choose a number that meets the “pay-as-you-go” rule.

They don’t have to believe in the growth number; that’s not the point. The point is simply to reward their friends and the Republicans have wealthier friends than Democrats, so a tax cut for the rich is the goal. The magical thinking growth rate is just the means to the goal.

It is time for the public to get involved. There was quite an outcry over House Republicans’ attempt to eliminate the independence of the Office of Congressional Ethics, and they backed down. We need to be vigil and make noise when shady deals come to light. Remember that Congress is supposed to work for us, the American people, not just the Americans who give them the most money.