Conservative economics has often felt like religious dogma, with its elevation of "a rising tide lifts all boats" to unintended extremes and its unfounded belief that lower tax rates create higher revenue. But, at least as far as that second article of faith is concerned, Conservanomics is becoming a church without bishops. Leading conservative economists are abandoning the idea that lower rates create more revenue. Without its elders the "less brings more" tax school is becoming a decidedly fringe movement, the fiscal equivalent of a flying saucer cult.
Want to guess who rushed to fill the void left by economic conservatives like Alan Greenspan and David Stockman? Whoever said "Sarah Palin" wins. The former half-term Governor of Alaska has become the nation's leading advocate of continued tax cuts for the wealthy, although her pitch still needs a little work. When Chris Wallace pointed out that she didn't know how to pay for the tax cuts she was pushing, for example, her answer began with this elliptical koan:
"It's idiotic," Ms. Palin continued. "And my palm isn't large enough to write -- to have written all my notes down on what this tax increase -- what it will result in. It's a tax increase of $3.8 trillion over the next 10 years, and it will have an effect on every single American who pays an income tax." Both of the Governor's (demi-Governor's?) statements are, in fact, false: The Obama proposal would only affect 2% of Americans - those earning over $250,000 - and the $3.8 trillion figure wouldn't be correct even if it cuts were allowed to expire for everyone.
Palmistry aside, did you notice what Ms. Palin did not do in that response? She didn't answer Wallace's question about paying for these cuts. For that we have to go to Arthur Laffer, whose ideas were originally used to promote the original "raising revenue by cutting taxes" mythos.
Laffer claims that he derived his ideas from the ancient treatises of Ibn Kaldun and the more recent work of John Maynard Keynes. But he took some reasonable observations about the upper limits of taxation to new and radical extremes. ,He drew a curve on a napkin, said the late Jude Wanniski, and everything became clear.
Lots of people write things on napkins, but they're usually treated with the appropriate level of skepticism. Wanniski was the Wall Street Journal editor who coined the terms "Laffer curve" and "supply-side economics." He held some interesting and suprising convictions - he was adamantly opposed to the Iraq war before his death, for example - but when it comes to economics, Wanniski was a brilliant salesman for some truly strange and terrible ideas. One of Wanniski's best sales jobs was in convincing the public that Laffer's ideas were credible, even though most scholars knew they were not.
In a recent Wall Street Journal editorial, Laffer repeats his pet idea that cutting taxes on the rich will increase revenue. Laffer's piece is entitled "The Soak-the-Rich Catch-22", which will give you a sense of its relationship to reality. It's filled with misinterpretations of the data, but the key mistake is this: Tax revenues from the top 1% didn't increase during the Bush years because of tax cuts. They went up because there was a massive upward redistribution of income. Their earnings rose even faster than their taxes were being cut. According to economist Edward Wolff's interpretation of Federal Reserve survey data, for example, "income of the bottom half (of the population) fell by 9 percent over the last 10 years [from 1998-2008] while the income of the top one percent rose by 40 percent."
Paul Krugman has famously referred to "invisible bond vigilantes," those creatures of the market that are allegedly going to punish us someday for government spending. Laffer and his ilk would have us believe in their cousins -- let's call them the "Invisible Tax Fairies" -- who are about to fly down from their perches in the gables and parapets of Wall Street to sprinkle us with gold. All we have to do to earn their love is be kind to rich people.
David Stockman, who is still a conservative Republican, calls proposals like Palin's and Laffer's a "perversion" of supply side theory. For right-wing economists, that's like an indictment for heresy. Says Stockman: "You can't keep borrowing from the rest of the world at that magnitude year after year after year .... I say we can't afford the Bush tax cuts." As for Alan Greenspan, he says ""I'm in favor of tax cuts, but not with borrowed money."
This is not to suggest that all is peace and love on the economic divide. Stockman and Greenspan still have profound differences with their more progressive colleagues. But, with this kind of firepower defecting from the Invisible Tax Fairy camp, where can Palin and Laffer turn for support? Try Rick Santelli. He's the television personality who helped trigger the allegedly "populist" Tea Party movement by leading a self-entitled on-air tantrum of ... get this ... Chicago commodities traders.
In a recent broadcast (starting at about eight minutes into the clip), Santelli began his policy broadside by saying that "paying teachers ... is noble, but it isn't a stimulus." He then added: "Maybe we need a recession to heal the problems that the trillion dollars (in bailout and stimulus) didn't address ... Maybe if the did the tax cuts originally the deficit would've gone up, but the money would've raised the 'M's.'"
While there's a lot of incoherence in this rant, Santelli seems to be suggesting that we could've put more money into circulation by cutting taxes even more -- but that paying teachers won't help at all. That's getting it exactly backwards: The rich tend to save their money, while middle-class earners like teachers spend much more of their income immediately. And as for the idea that "we need a recession" to heal our problems, well ... that's the kind of logic you get once you catch the bus for Invisible Tax Fairyland.
The political voice of the Palin/Santelli intellectual movement is Rep. Paul Ryan, who has issued a "Roadmap for America's Future." As Krugman explains, "nobody checks his arithmetic." Krugman calls Ryan a "Flimflam Man," and the reasons he gives for that harsh assessment are persuasive. The core of Krugman's takedown is this: Ryan's plan won't "cut the deficit in half," despite claims to that effect. In fact, a nonpartisan group says it would reduce revenue by almost $4 trillion over the next ten years. Krugman:
"The Tax Policy Center finds that the Ryan plan would cut taxes on the richest 1 percent of the population in half, giving them 117 percent of the plan's total tax cuts. That's not a misprint. Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population."
That's a perfect snapshot of the Republican Conservanomic agenda: Expand an already-massive transfer of wealth from the middle class to wealthy Americans. Let America's government and infrastructure collapse for lack of funding. And fool the people by pretending that Magical Tax Fairies will wave their wands and make everything all right. Nobody loses in the dream world they're selling. It's the fiscal version of Flip Wilson's old comedy routine, "Everybody wants to go to heaven but nobody wants to die."
And hey, if that doesn't work we can always try Rick Santelli's suggestion and have another recession. In fact, if we believe what Palin, Ryan, and Santelli say we will have another recession ... before a lot of people in this country are out of this one.
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.
He can be reached at "email@example.com."
Website: Eskow and Associates
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