Selling the 'Supply-Side' Myth

By Robert Parry, Consortium News

28 January 12

espite Newt Gingrich's claim that "supply-side" economic theories have "worked," the truth is that America's three-decade experiment with low tax rates on the rich, lax regulation of corporations and "free trade" has been a catastrophic failure, creating massive federal debt, devastating the middle class and off-shoring millions of American jobs.

It has "worked" almost exclusively for the very rich, yet the former House speaker and the three other Republican presidential hopefuls are urging the country to double-down on this losing gamble, often to the cheers of their audiences — like one Florida woman who said she had lost her job and medical insurance but still applauded the idea of more "free-market" solutions.

Gingrich even boasts of his role in pioneering these theories of massive tax cuts favoring the rich, combined with sharp reductions in the role of government. That approach, once famously mocked by George H.W. Bush as "voodoo economics," was supposed to spur businesses to expand production (the "supply side"), thus creating jobs and boosting revenues from all the commercial activity.

"I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event. "We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.' It had one great virtue: it worked."

But that is not what the historical record really shows.

In 1980, I was working as an Associated Press correspondent covering budget and economic issues on Capitol Hill - and at the time, the "supply-siders" had two key arguments in their favor: first, the economy had stagnated in the 1970s largely due to oil price shocks, inflation and an aging industrial base.

Their second key advantage was that nobody could say for sure what the results of the "supply-side" experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his "voodoo" remark, but you couldn't see the future.

No More Mystery

Now, however, with three decades of experience with the experiment, the fallacies of "supply-side" economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has been the absence of "demand-side" consumers, not the availability of money to build more productive capacity.

And the reason that there are fewer consumers is that the Great American Middle Class, which the federal government helped build and nourish from the New Deal through the GI Bill to investments in infrastructure and technology in the Sixties and Seventies, has been savaged over the past three decades.

Though many Americans were able to cover up for their declining economic prospects with excessive borrowing for a while, the Wall Street crash of 2008 exposed the hollowing out of the middle class. So today, businesses are sitting on vast sums of cash - some estimates put the amount at about $2 trillion.

And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories.

For Americans, this has represented a downward spiral with no end in sight. American workers, whether blue- or white-collar, know that computers and other technological advancements have made many of their old jobs obsolete. And modern communications have allowed even expert service jobs, like computer tech advice, to go to places like India.

While painful to millions of Americans who find their talents treated as surplus, these developments do not by themselves have to be negative. After all, humans have dreamed for centuries about technology freeing them from the grind of tedious work and freeing up society to invest in a higher quality of life, for today's citizens and for posterity.

The problem is that the only practical way for a democratic society to achieve that goal is to have a vibrant government using the tax structure to divert a significant amount of the super-profits from the rich into the public coffers for investments in everything from infrastructure to education to arts and sciences, including research and development for future generations, even possibly Gingrich's "big idea" of a colony on the moon.

In fact, that kind of virtuous cycle was the experience of the United States from the 1930s through the 1970s, with the federal government taxing the top tranches of wealth at up to 90 percent and using those funds to build major electrification projects like the Hoover Dam and the Tennessee Valley Authority, to educate World War II veterans through the GI Bill, to connect the nation through the Interstate Highway system, to launch the Space Program, and to create today's Internet.

Out of those efforts emerged robust economic growth as private corporations took advantage of the nation's modern infrastructure and the technological advancements. Millions of good-paying jobs were created for the world's best-trained work force, giving rise to the Great American Middle Class. The obvious answer was to keep this up, with the government investing in new productive areas, like renewable energy.

Demonizing 'Guv-mint'

Instead, facing economic headwinds in the 1970s, caused in part by rising energy costs, Americans grew anxious about their futures, making them ripe for a new right-wing propaganda campaign demonizing "guv-mint" and telling white men, in particular, that the "free market" was their friend.

Blessed with a talented pitch man named Ronald Reagan, "supply-side" became the new product to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan also initiated an aggressive military buildup.

The results were devastating to the U.S. fiscal position. The federal debt soared, quadrupling during the 12 years of Reagan and Bush Sr. As a percentage of the gross domestic product, federal debt was actually declining in the 1970s, dropping to 26 percent of GDP, before exploding under Reagan, rising to 41 percent by the end of the 1980s. The shared wealth of the country also diverged, with the rich claiming a bigger and bigger piece of the national economic pie.

The nation's debt crisis only began to subside after tax increases were enacted under President George H.W. Bush and President Bill Clinton, with Clinton's tax hike pushing the top marginal rate back up to 39.6 percent. At the time, Gingrich warned that the Clinton tax hike would lead to an economic catastrophe.

The actual result was a booming economy, spurred strongly by the federal government's new "information super-highway," the Internet. The Clinton years also saw low unemployment and a balanced budget by the late 1990s. The debt-to-GDP measure declined from about 43 percent to 33 percent and was on course toward zero within a decade.

Ironically Gingrich also claims credit for that because - as House speaker - he worked with Clinton on some cost-cutting measures, but Clinton credits the 1993 tax increase, which passed without a single Republican vote, as the key factor in the budget turnaround.

After George W. Bush claimed the White House in 2001, "supply-side" dogma was back in vogue. Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent. Combined with Bush's two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit.

Even as most Americans struggled to hold a job and pay their bills, America's super-rich lived a life of unparalleled luxury. With this concentration of money also had come a concentration of power, as right-wing operatives were hired to build a sophisticated media apparatus and think tanks to push - often with populist rhetoric - the policies that were dividing the country along the lines of a pampered one percent and a pressured 99 percent.

Many Americans, especially white men, heard their personal grievances echoed in the angry voices of Rush Limbaugh, Sean Hannity, Michael Savage and Glenn Beck - all well-compensated propagandists for "the one percent."

Lesson Unlearned

Now, looking back over the economic and fiscal history of the past three decades, you might think that few Americans would be fooled again by this sucker bet on "supply-side." But the Tea Partiers and many rank-and-file Republicans seem ready to put what's left of their money back down on the gambling table.

All four remaining Republican hopefuls - Mitt Romney, Rick Santorum, Ron Paul and Gingrich - have proposed lower tax rates especially on the rich with the same enduring but fanciful faith in "supply-side" economics.

Gingrich has gone so far as to advocate eliminating the capital gains tax entirely. It's already down to 15 percent, meaning that many super-rich, from financier Warren Buffett to Mitt Romney, can live off their investments and pay a lower tax rate than what many middle-class Americans pay on their wages and salaries. In a recent Florida debate, Romney noted he would pay virtually no federal income tax under Gingrich's plan.

The Republicans seem to be counting on the parallel propaganda campaign of demonizing "guv-mint." They're pinning their hopes on an ill-informed electorate (especially white men) siding with "the one percent" over their own working- and middle-class interests.

The GOP hopes also may hinge significantly on how determined some whites are to get the country's first black president out of the White House. Historically, demagogic U.S. politicians have had great success in exploiting racial resentments, although these days often with coded language like Gingrich calling Barack Obama "the food-stamp president."

The Right also has worked diligently to create false narratives to convince many Americans that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have bought into the historical lie that the Founders wrote the Constitution to limit the power of the federal government and to promote "states' rights" - the near opposite of what the framers actually were doing.

Led by Virginians Gen. George Washington and James Madison, the Constitutional Convention in 1787 threw out the Articles of Confederation, which had made the states supreme and the federal government a supplicant.

The Constitution reversed that situation, eliminating state "independence" and bestowing national sovereignty onto the federal Republic representing "we the people of the United States." Contrary to the Tea Party's false narrative, the Constitution represented the single biggest assertion of federal power in U.S. history.

When the Tea Partiers dress up in Revolutionary War costumes, they apparently don't know that their notion of a weak central government and state "sovereignty" was anathema to the key framers of the Constitution, especially to Washington who had watched his soldiers suffer under the ineffectual Articles of Confederation.

And, when the Tea Partiers wave their "Don't Tread on Me" flags of a coiled snake, they don't seem to know that the warning was directed at the British Empire and that the banner aimed at fellow Americans was Benjamin Franklin's image of a snake severed into various pieces representing the colonies/states with the admonishment "Join, or Die."

Nevertheless, false narratives and false arguments can be as effective as real ones to a thoroughly misinformed population. Thus, many middle- and working-class Americans still cheer when Newt Gingrich references Ronald Reagan and his "supply-side" economics.

But the failure of Reagan's economic strategy should be obvious to anyone who is not fully deluded by right-wing propaganda. Not only has the national debt skyrocketed over the past three decades, but whatever economic benefits that have been produced have gone overwhelmingly to the wealthy - while the nation as a whole has suffered.

For more on related topics, see Robert Parry's "Lost History," "Secrecy & Privilege" and "Neck Deep," now available in a three-book set for the discount price of only $29. For details, click here.

Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, "Neck Deep: The Disastrous Presidency of George W. Bush," was written with two of his sons, Sam and Nat, and can be ordered at neckdeepbook.com. His two previous books, "Secrecy & Privilege: The Rise of the Bush Dynasty from Watergate to Iraq" and "Lost History: Contras, Cocaine, the Press & 'Project Truth'" are also available there.

Is Obama's 'Economic Populism' for Real?

By Matt Taibbi, Rolling Stone

27 January 12

here is a lot to digest in a recent series of events on the Prosecuting Wall Street front - the two biggest being Barack Obama's decision to make New York Attorney General Eric Schneiderman the co-chair of a committee to investigate mortgage and securitization fraud, and the numerous rumors and leaks about an impending close to the foreclosure settlement saga.

There is already a great debate afoot about the meaning of these two news stories, which surely are related in some form or another. Some observers worry that Schneiderman, who over the summer was building a rep as the Eliot Ness of the Wall Street fraud era, has sold out and is abandoning his hard-line stance on foreclosure in return for a splashy federal posting.

Others looked at his appointment in conjunction with other recent developments - like the news that Tim Geithner won't be kept on and Obama's comments about a millionaire's tax - and concluded that Barack Obama had finally gotten religion and decided to go after our corruption problem in earnest.

At the very least, Obama's recent acts were interpreted as a public move toward economic populism: if the president was looking to associate himself with that word, he did a good job, since there were literally hundreds of headlines about Obama's "populism" the day after his State of the Union speech.

I think it's impossible to know what any of this means yet. There is a lot to sort out and a lot that will bear watching in the near future. Just to recap, here's what's at stake right now:

The impending, much-discussed foreclosure settlement is the Obama administration's great bailout initiative. If it goes through with the kind of tiny numbers being discussed ($25 billion from the banks if California is in the deal, $19 billion if California AG Kamala Harris stays out), then what we're talking about is a bailout on par with TARP.

The potential liability each of the banks faces from foreclosure litigation is vastly greater than $25 billion, and uncertainty surrounding that litigation is holding the stock prices of all of the major companies (in particular struggling ones like Bank of America) down.

A settlement would release those firms from that potential liability and likely bring massive surges in stock-market investment. It would therefore have a profound strengthening effect on the Too-Big-To-Fail banks. If the Obama administration wanted to be 100% real on the Wall Street crime front, it would suspend this deal pending the investigation by the new mortgage committee. But if the deal does indeed go through, we'll know that the banks still have major influence with our populist president.

Some people have been confused about Schneiderman's new role. The new Unit on Mortgage Origination and Securitization Abuses will not be investigating the same abuses covered in the foreclosure settlement. When the public thinks about corruption in the housing markets on the part of the big banks, what it mostly thinks of is robosigning and the other mass-perjury issues, which is the stuff targeted in the foreclosure settlement.

But in fact those problems were a tawdry little sideshow to the more serious crimes of the housing crisis. Schneiderman himself outlined the different after the announcement of the new unit's creation:

Schneiderman said Wednesday his dual roles — raising concerns about a multi-state settlement with the major banks and investigating the mortgage problem — wouldn't be at odds.

"These are abuses in the foreclosure process. Our working group is focusing on the conduct related to the pooling and the creation of mortgage-backed securities and issues relating to the conduct that created the crash, not the abuses that happened after the crash."

My first thought, when I heard about this deal, was that Schneiderman was deciding to compromise on robosigning and other post-securitization abuses, in exchange for a mandate to go after the much bigger crimes, which took place in the origination/securitization stages.

The securitization offenses were massive criminal conspiracies, identically undertaken by all of the big banks, to defraud investors in mortgage-backed securities. If you're looking for an appropriate target for a massive federal investigation, one that would get right to the heart of the corruption of the crisis era... well, they picked the right target here.

If they were to do a real clean sweep on securitization, the federal prisons would end up literally teeming with senior executives from the biggest banks. A lot of very big names would end up playing ping-pong and cards in Otisville and Englewood.

The question is, how real of an investigation will we get? The fact that Schneiderman's co-chairs are Lanny Breuer and Robert Khuzami make me extremely skeptical. I'm actually not sure that both men, in an ideal world, wouldn't be targets of their own committee's investigation.

Before joining the SEC, Khuzami was senior counsel of the fixed-income desk at Deutsche Bank, which was creating exactly the sort of dicey CDOs that this investigation ought to be targeting.

Breuer, meanwhile, worked for the hotshot defense firm Covington and Burling, which among other things provided legal help that led to the creation of the electronic mortgage registry system MERS.

The MERS issues are probably more the province of the foreclosure settlement, but the banks' joint efforts to evade the paper registry system are certainly an element of the larger effort to defraud MBS investors that will be covered by this committee. In fact, I'm not sure that mortgage securitization and the proliferation of CDOs and CDS could have taken place on anywhere near the scale that it did without MERS.

So having those two guys attached to Schneiderman's hip makes me wonder what is going on here. Khuzami's presence is especially odd. The theoretical reason we need a committee like this in the first place is because the federal agency that is supposed to be doing this work - the SEC - has stubbornly refused to do so.

If as SEC enforcement chief Bob Khuzami has not investigated the vast corruption involved with the creation of mortgage backed securities (it's called "securitization" - it should be policed by the SECURITIES and exchange commission), then why would he start now? Even leaving out his potential culpability from his Deutsche days, Khuzami has been part of the problem, if anything.

I would feel better about a committee that not only didn't have a White House flack and a failed/compromised SEC enforcement chief sitting on it, but had nobody with any ties to Wall Street at all. The argument for them would be that we need someone with expertise on the committee, but I'm not buying it. I'd rather see Schneiderman hole up in an abandoned warehouse with ten vice detectives from someplace like Detroit or Miami. And Charles Martin Smith, if they can get him.

Seriously: despite what people think, the crimes we’re dealing with are not terribly complicated, and any veteran investigator would grasp the basic concept – taking worthless crap and selling it as high-end merchandise – within ten minutes. The most important element contributing to the success of a committee like this is a locked room full of clean hands. And Breuer and Khuzami are not a good start.

But it’s too early to say what is going on. Everything that I’ve heard about Schneiderman in the last year leads me to believe that he’s the genuine article. I haven’t heard a single thing suggesting otherwise. But there are certainly a lot of curious elements here. For one thing, as Yves Smith points out, Schneiderman really isn’t getting much extra authority by taking this post. As New York AG he could already have taken this investigation anywhere he wanted:

It’s clear what the Administration is getting from getting Schneiderman aligned with them. It is much less clear why Schneiderman is signing up. He can investigate and prosecute NOW. He has subpoena powers, staff, and the Martin Act. He doesn’t need to join a Federal committee to get permission to do his job. And this is true for ALL the others agencies represented on this committee. They have investigative and enforcement powers they have chosen not to use. So we are supposed to believe that a group, ex Schneiderman, that has been remarkably complacent, will suddenly get religion on the mortgage front because they are all in a room and Schneiderman is a co-chair?

One thing we do know: Obama’s decision to tap Schneiderman publicly, and dump Geithner, and whisper about a millionaire’s tax, signals a shift in its public attitude toward the Wall Street corruption issue. The administration is clearly listening to the Occupy movement. Whether it’s now acting on their complaints, or just trying to look like it’s doing something, is another question. It’s way too early to tell. But it’s certainly very interesting.