THE BLOG
06/22/2012 10:30 am ET | Updated Aug 22, 2012

Why Reaganomics Fails -- Succinctly

How we have spent 30-plus years arguing over what George H. W. Bush called "voodoo economics" is just hard to justify. But here, in 2012, we are arguing over Reaganomics even more vehemently than when Reagan proposed it. The fact that Reaganomics is an utter failure should be obvious, but apparently it's not to about 50% of the population, judging by national election politics. Our politics, even globally, has been about little more than economic policy for 150 years. The liberty and justice centerpieces of the Constitution have been recolored as economic issues rather than the everyman human rights they were meant to guarantee. The political debate has turned from liberty and justice for everyone to the liberty of business to impose its will on labor, markets and government.

Economic growth is the political definition of life. Our economy must grow if only because population grows. When economic growth lags behind population growth, people are consuming less per capita. Translation: when economies do not grow, poverty grows. No government can withstand a prolonged downtrend in its economy. People have limits. The barest responsibility of government is to match economic growth with population growth. Failing that, governments fall.

When you take money out of the economy, it gets smaller, it is in a failing trend. The only thing that can reverse that is an injection of money into the economy. Without new money, the natural inclination of business is to retrench and spend less on employees, capital investments and marketing. The result is rising unemployment directly and indirectly in capital equipment producers and marketing service industries, shrinking the economy further. A downtrend in an economy is a self fulfilling increasing function of time.

It would seem that we have eventually recovered from every recession/depression in our history, even before the Fed or Keynes. There is a theoretical bedrock in every economy that once you hit it, economies will not contract further. That bedrock is the absolute limit of what amount of hardship people can bear, at which point the economy can start over rebuilding again. It is a point at which food and fuel are the only things bought and sold or grown. It is an economy like that of sub-Saharan Africa. It is bottomed out.

The reason we try to save economies is because we all now have more to lose -- all of us, the rich, the middle class and the poor. No government will long stand whose economic policy is to let the economy bottom out, as Hoover discovered. We want to keep our jet skis and get those granite countertops.

The question for 2012 is how you think the economy is best infused with new money. That it needs to be is unquestionable. The government can either borrow it or the Fed can "print" it, or business can spend it on investments and labor. There's no magic to it.

Even magical new products, the production of which might employ tens of thousands of people, all need a consuming public with disposable money to which they can be sold. A drug guaranteeing eternal life could be invented and most in sub-Saharan Africa could obtain it unless it was free, as they already spend every cent and effort they have to survive today. You can't sell life itself to people who can't afford your price for it.

We all started out only able to afford a day's life for a day's work. Division of labor lifted us out of that. Specialization created efficiencies that allowed some to make more product for less effort. Beating the hand-to-mouth equation of life creates what we call wealth. Work a day and get 1.1 days of buying power. Become more efficient and get 1.5 days of buying power per day of work. More and better efficiency is why there is wealth at all and it was an eons-long process to get us to where we now are. In the last 150 years, we have increased the world's wealth orders of magnitude over what it was prior to the industrial revolution. The industrial revolution was not powered by the invention of magical products, it was powered by the invention of theretofore inconceivable efficiencies.

Efficiency creates wealth for the producer, but it also may bring down the cost of products to consumers making them effectively more wealthy without any effort on their part. On this simplistic observation, Reagan seems to have based his economic world view of supply side economics and "trickle down." There's no knowing for sure. Probably Reagan himself couldn't have enunciated anything more than that about his own philosophy. Humans, particularly ideological humans, are not terribly self aware of their own thought processes.

Economies are simple enough, but not quite as simple as Reagan may have wanted them to be. Modern economies, built on efficiency, are a chicken and egg problem because labor and industry evolved concurrently. Capital provided the equipment of industry and labor provided the day to day skill to make use of it. Capital provided the wherewithal to produce research and researchers, labor, provided the mind power of research. Capital, labor and researchers combine to create products that are failures unless there are consumers who can afford to buy them. Economies are an intersection of the vitality of four complementary components, labor, capital, research and consumers. Minus any one of those components, we are all still living in a sub-Saharan Africa economy.

All four economic components must progress together or none will produce growth. Capital alone will not produce growth, it needs labor, research and consumers. Labor alone will not produce growth because it needs capital, research and consumers, etc. More than anything else, capital needs consumers in order to make money. By cutting the wages of labor and even researchers, capital insures it will not have consumers in the future. Keynes said that government is the consumer of last resort. Business doesn't seem to understand that it's their product that needs that last resort consumer, and the more elective the consumption of it is, the more they need government to support an economy that produces a surplus of median income. Reagan did not propose that kind of government.

The full Reaganomics program was not only tax cuts for the rich and corporations, it included union busting and social spending cuts. Social spending cuts were meant to offset the reduction in revenue created by the tax cuts, a just mean leverage of the lack of representation for the poor which actually shrunk the economy. Union busting was presumably meant to cut costs for business and create more capital that could then drive economic growth. But capital on it's own can't drive growth. In order to have economic growth, the public has to be able to spend on products other than sustenance and shelter. Reducing wages of union workers dragged down the wages of non-union workers and shrunk the economy into which capital wanted to sell product. It was an unforced error in economic policy that still has ideological support after thirty years of U.S. economic travail.

Reaganomics was logically unsupportable and is historically and mathematically discredited, yet the right doubled and now wants to triple down on that philosophy as sound policy. The only logical conclusion to take away from Reaganomics' current level of public support is that greed trumps reason and history by such a degree as to blind us all to the future. Like many sub-Saharan Africans, we are eating next year's seed corn because our GOP leadership is telling us not to worry about it. The rich will feed us next year. The job creators will feed us next year but only if we can still buy their products next year.