What is Voodoo Economics?

            During the Presidential campaign of 1980 the top two Republican contenders were Ronald Reagan and George H.W. Bush.  Reagan based his campaign on a then little known economic theory proposed by Arthur Laffer a few years earlier that had become known as the “Laffer curve”.  This theory was a version of a more general theory known as “supply-side” economics.  The idea was to cut income tax rates for the very rich, which would then save a majority of their new after-tax income and make funds available for new investment, which would result in an increase in supply, or output, and create new jobs while also leading to a reduction in average prices.  The Laffer spin was to argue that the new investment and output would increase Gross Domestic Product (GDP) and lead to increased government tax revenues, which would reduce the budget deficit.  We could then enjoy full employment, lower inflation, a balance government budget, and still have funds for increases in needed government programs.

        George Bush quickly labeled Reagan’s program “voodoo economics” because it was an untried, untested theory based largely on wishful thinking.  But the proposal was in stark contrast to the current economic policy of Jimmy Carter, which had resulted in high unemployment, high inflation, high interest rates, and large government budget deficits.  Reagan would up winning the Republican nomination and then asking Bush to run as his vice-president.  Bush accepted and then spent the next 12 years defending “voodoo economics” as the most sensible program in history.  After 8 years of Reagan’s presidency, Bush followed with 4 years in which his own economic program was to argue that Reagan had done everything that was necessary for economic stability.

        Reagan had argued that passage of his tax cuts would lead to economic prosperity and a balanced budget by 1984.  The last Carter deficit was $73.8 billion, which Reagan labeled as totally unacceptable and promised to quickly balance the budget.  Hence the phrase that “tax cuts pay for themselves” became part of the Reagan campaign and has been a central part of Republican tax policy for the past 30 years.  Laffer/Reagan argued that tax cuts lead to increased output and increased tax revenue so revenues actually increase when you reduce tax rates, because the tax base expands by a larger percentage than the cut in rates.  The problem was that tax revenues did not increase more than proportionately and the deficit ballooned to $222 billion during the Reagan years and to $290 billion during the Bush years.  In the later years of his Presidency Reagan argued that there were “good” deficits created by tax cuts and “bad” deficits created by increased spending.

        The most significant impact of the Reagan tax policies was the beginning of the largest income redistribution upward since the 1920s.  Since 1980 the only income class that has seen a significant and consistent increase in their average incomes has been the top 5% of the population.  The bottom 95% of the population has seen stagnant or falling incomes in both percentage terms and in inflation adjusted dollar terms.  That trend has continued and accelerated over the past decade as a result of the George W. Bush tax cuts in 2001 and 2003.

        The Reagan/Bush years ended with the now infamous “read my lips” tax increase of 1991 and the even larger tax increase of Bill Clinton in 1993, and four years of budget surplus at the end of the Clinton years.  When George W. Bush was elected in 2000 he quickly moved to follow the Reagan tax philosophy with two tax cuts in 2001 and 2003 designed to stimulate the economy with tax cuts for the wealthiest Americans.  The result, combined with two wars in Afghanistan and Iraq, led to the largest budget deficits in history (over $455 billion) and a more than doubling of the national debt.  The Bush years ended with a Great Recession, the largest financial collapse since the 1930s, and the election of Barack Obama.

        Obama began his presidency by continuing the very unpopular bank bailout instituted by Bush in the fall of 2008, and by proposing and getting passed a $787 billion economic stimulus program, which increased the annual budget deficits to over $1 trillion .  He then passed a controversial health care reform bill, but recession and high unemployment have continued to plague his presidency and led to a Republican takeover of the House of Representatives in 2010.  Problems have also led to a host of Republican Presidential contenders who want to replace Obama in 2012 and believe he is extremely vulnerable.  But every Republican candidate has proposed the same Reagan/Bush tax policies of stimulus by more tax cuts for the wealthy and corporations.

        The purpose of this blog is to examine the ongoing Republican tax policies and see if there is any merit in the belief that they will reduce unemployment and finally lead to economic recovery.

        “Voodoo economics” will be defined as the belief that “You can achieve the economic outcomes you want through wishful thinking” or “If you say something often enough and long enough it will be accepted as truth even if there is no evidence to support its claims.”  Examples of this thinking are “Tax cuts pay for themselves”, “The rich now pay an unfair and rising tax burden”, “Forty-seven percent of American families now pay no taxes”, “A reduction in corporate tax rates is the best way to stimulate the economy and create jobs”, “If we eliminate the income tax on dividends and capital gains it will lead to stimulus and job creation”, and “By calling for higher taxes on the wealthy President Obama is promoting ‘class warfare’”.

        I hope to make a new post to this blog each week.  My hope is that this schedule will give me the incentives and deadlines I need to complete the work on a book by the same name.  I should also confess that I am not a Democrat or a Republican, but have been a registered Independent for over 40 years.  While my emphasis now is on Republican tax policies, I also believe that a corollary of my voodoo economic definition could be “If you create enough government programs and spend enough money you can eventually solve all economic problems.”  Examples of this thinking are the War on Poverty, the War on Drugs, and the Obamacare health care reform.  I just happen to currently believe that Republican tax proposals are more dangerous to our long term economic health than are Democratic spending programs—yes, even Obamacare, which I believe is misguided and will not solve the real economic problems of health care, and will probably make them worse.