Why the US is at an Economic Impasse

My last book review for The Library Journal was about the original edition of Bruce R. Barlett’s Reaganomics: Supply Side Economics in Action, with introduction by Jack Kemp, published in 1981. Library Journal reviews are specifically written by librarians for librarians, so they are exceedingly economical –  they run 25 lines or less of a narrow column. Normally the editors of LJ didn’t change my reviews, but this editor did. She took my assessment that Mr. Bartlett was an was “articulate” spokesman for his group’s views. She turned that into a notion that Mr. Bartlett’s presentation about supply-side economics were “accurate”.

As soon as I saw her mistake I contacted her. We debated the issue. “Articulate,” I said meant “well-said”, but not necessarily “correct”. She insisted that “logical” equalled “right.”  With no promise that my meaning wouldn’t be edited again in the future, I resigned as reviewer.

I respected Jack Kemp and Bruce Bartlett, but I sure didn’t agree with their views. And now I’m dismayed to see how their views are being even rendered into something even more “wrong” for the US. Here is why the US Government is at an economic impasse.

Keynesian (demand-side) economics

Supply side economics was the 1980s alternative to liberal Keynesian economics. Keynesian theory was  born during the Great Depression of the 1930s. Lord Keynes, a British economist, suggested a government should spend the country’s way out of trouble when its economy slumps badly. This is basically what’s called “demand-side” theory of economic recovery.

Keynesian economics believes a slump in demand for goods and services from consumers is what is causes our unemployment and debt problems. Low demand for consumer goods means loss of jobs which means even lower demand for consumer goods. It’s a downward spiral. To stop the spiral, Keynesians rely on low interest rates and government spending to jump-start a stagnant economy.

Their opponents at this point in time argue that our government has kept interest rates low, and it has spent money (the “stimulus”), but the economy hasn’t been jump-started. It’s a fact that right now that US companies are sitting on trillions of dollars at home and abroad that they are not spending on production and job creation. But what, other than just plain use of force by the US government, will motivate corporations to spend that money on the American economy? Does supply-side economics have an answer?

Supply side economics

Supply-side theory, a term coined in the mid-1960s by Herbert Stein, advisor to President Nixon, and  later promoted by a Wall Street Journal editor and a couple of economists named Arthur Laffer and Bruce Bartlett, was adopted by Ronald Reagan during his presidency in the 1980s. Supply-side economics was also referred to as “trickle-down” economics.

While Keynesian economics as a long-run strategy or a short-run strategy for all seasons can certainly be questioned, supply-side economics clearly didn’t work at all. the Reagan government in the 1980s began a precipitous march into more and more US government debt to fund the wealthy, but that wealth never trickled down or created prosperity. In more recent times, not only did the Obama stimulus not work well, but the Bush II tax-breaks didn’t work at all! We extended those tax-breaks for the wealthy and the middle classes, and nothing improved. Things have just gotten worse since Bush II left us with a mess.

It seems really iffy that either a huge new government spending-spree or any more tax-subsidies for the wealthy are going to do much of anything to jump-start our economy. We’re stuck while the US government goes in circles like a rowboat trying to get someplace with two paddles that are fighting each other.

Many liberals thought that supply-side economics had died along with Ronald Reagan. Even George H.W. Bush called it “voodoo” economics. But…Here we go again…! One side of the debate in DC is now advocating supply-side economics with their calls for “job-creators” to be given even more tax breaks subsidies while the working classes do without even more, even though working class (middle class) income has declined steadily for the past four decades.

What is the reasoning behind supply-side thinking? Here’s one pundit’s comment that puts it in a nutshell. “The Supply-Sider’s Hoax: Bush-I called it voodoo economics (but he got stuck with it). Their “theory” is that cutting taxes for the super rich will encourage them to work so much harder and make so much more money that they will pay more taxes, even though their tax rate went down. Well the voodoo didn’t work in 20 out of 20 years. And now they want to try it again. And they’ve scared America again about the debt. It’s easier now that they’ve run it through the roof.”

Even Bruce R. Bartlett does not see the present-day supply-side argument as tenable. He wrote in a New York Times op ed piece April 4, 2007, “Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances.”

Trickle-down economics

Where did the trickle-down idea associated with supply-side economics come from?  It came from the belief that as the rich got richer (and paid in a higher percentage of aggregate or total taxes) some of their wealth would trickle down to the workers who were hired with that tax money.  So tell me, is that what’s happening now? Did the Bush tax cuts for the rich create more jobs during the 8 years of his presidency? Have taxes on the exploding new wealth of the rich gone to hire more American workers? You know the answer to that.

These tax break revenues have been going straight back into the pockets of the job creators, not the workers. Meanwhile unemployment has skyrocketed to nearly 10 percent. Corporations are sitting on trillions of dollars in cash. They aren’t spending it on jobs, at least not on American jobs.

What we have now is supply-side economics with no trickle-down allowed. Yes, the percentage the rich pay of total taxes has increased. And no, the government sure isn’t going to be allowed to spend that money to increase jobs for Americans given the current Republican quest to pare down the size of government. But nor are corporations likely to do so either.

Gush-away economics

I suggest the present form of economics should be called “gush away” economics. Gush-away is where the US bleeds out more and more money to foreigners each year, the foreigners who hold a claim to its debt, the foreigners who are getting American jobs.

There are all kinds of scary figures floating around right now. Speakers constantly confuse the debt and the deficit as the same thing, and they throw around a lot of different big numbers with no explanation of what they mean.

Those of us who don’t deal in trillions, billions, or even millions of dollars have no idea how to interpret these figures or guess what the changes in them over time might actually mean. We are just left feeling afraid and disbelieving at the same time. No wonder! Any way we look at it, we foresee only loss in our futures.

I don’t believe the US is in as much trouble as the fear mongers would claim. But how far down the slope of gush-away economics do we have to slide before someone comes up with an economic theory based on aiming for a balanced growth and fair-share taxation, rather than the binge (Keynesian) or purge (supply-side) mentality of our two competing traditional theories about economic recovery?

I just have to wonder, where is the wise economist who can make us a sail for our “rowboat,” before both of its “paddles” manage to smash each other and our boat to smithereens.

Follow Nancy Humphreys on Twitter @brucenomics