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Finance

An economic safari

Photo: a. silverman

I have spent a lot of time in Africa watching lions hunt. The hard work is done by the lionesses, but the male eats first – sound familiar, ladies? When the lions have had their fill, the hyenas get a turn, then the jackals and vultures, and finally all the smaller creatures. Nothing is wasted (an opinion clearly not shared by the prey).

I thought about that when I started to write about “trickle-down economics,” “supply-side economics,” or simply “Reagan-omics.” The theory is that if you lower taxes on corporations and those with higher incomes, they will invest the extra money in business, and that will create more jobs for everyone – as long as government regulation does not get in the way. The theory asserts that the increase in business revenue will generate sufficient extra tax revenue to offset the cut in tax rates.

Ronald Reagan ran for the presidency on a platform of smaller government and lower taxes. In August 1981, he signed the Economic Recovery Tax Act that reduced the top marginal income tax rate from 70 percent to 50 percent. In 1986, he further reduced the top rate to 28 percent. But he also closed tax loopholes in 1982, resulting in the largest tax increase in 40 years. In 1983, he signed legislation to maintain funding for Social Security by raising payroll taxes and taxing the Social Security benefits of some higher earners. Over the rest of his term, he signed a series of increases that took back about half of his original 1981 tax cut. As I wrote in a previous column, the national debt also increased three-fold during Reagan’s presidency.

If you look at that fiscal record, and remember that he supplied weapons to the Taliban along with selling weapons to the Ayatollah in Iran, you might reflect that Reagan would have difficulty gaining the Republican nomination for president in 2012.

Opponents of trickle-down economics have some persuasive arguments. Last September, the Federal Reserve reported that nonfinancial companies were holding more than $2 trillion in cash and other liquid assets. Much of this is held offshore where it avoids U.S. taxes. Former Senator Bill Bradley recently pointed out that if only 20 percent of that money were spent hiring new employees at an average annual income of $50,000, we could create 7 million new jobs. That would reduce our national unemployment rate to less than five percent.

Supporters of the trickle-down theory assert that it is the threat of higher taxes and uncertainty about further regulation that keeps this cash out of the job market – and out of the country. After we know the election results this fall, we may be able to test how sincere this assertion is.

Among the leaders of the opposing view are two Nobel Prize-winning economists: Joseph Stiglitz and Paul Krugman. Though they do not often agree with each other, they do agree that trickle-down economics does not work. They are both proponents of the theory of John Maynard Keynes, a British economist who stated that recessions and depressions call for massive government intervention of the kind undertaken by the Roosevelt administration in the 1930s. Krugman points out that we have a chicken and egg problem. Businesses are not spending money on hiring because there is not enough demand for their products. The only way to increase demand for products is to have more people employed so that they are comfortable going out to buy new things. Disciples of Keynes assert that this vicious circle can only be broken by
government investment.

Of course, opponents of the current administration point out that we have spent $787 billion on a stimulus program and unemployment has not dropped much. To which Krugman replies that the stimulus was not large enough and President Obama had to compromise with a smaller package in order to get it through the Senate.

As I think of my experience in Africa, I cannot help but think that trickle-down economics is less like the lion and more like the African elephant. This magnificent animal has a highly sophisticated, matriarchal social structure. Their family life and care for their young provide lessons that we humans might well learn from. However, the elephant has a very inefficient digestive system. As a consequence, the elephant must consume vast quantities of leaves, bark and branches – much of which passes through and is deposited on the ground undigested. As you travel through Africa, you notice that baboons, birds, dung beetles, and many other creatures survive on what the elephant did not digest.

Perhaps the trickle-down economists think we should be content eating what is dropped on us from above.

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