On Voodoo Economics, the Debt Ceiling Debate, and Hyperinflation
Bruce Bartlett, a Republican political appointee and domestic policy advisor to Ronald Reagan, points out that:
taxes were cut in 2001, 2002, 2003, 2004 and 2006.
It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year…
According to a recent C.B.O. report, they reduced revenue by at least $2.9 trillion below what it otherwise would have been between 2001 and 2011. Slower-than-expected growth reduced revenue by another $3.5 trillion.
Spending was $5.6 trillion higher than the C.B.O. anticipated for a total fiscal turnaround of $12 trillion. That is how a $6 trillion projected surplus turned into a cumulative deficit of $6 trillion.
Bartlett offers this killer chart as a summary of the numbers:
If you recall, it was George W. Bush’s father, GHW Bush, who, when campaigning against Reagan, called supply side economics’ claims that tax cuts pay for themselves Voodoo Economics. And Bush was proved right when deficits spiralled out of control and both Reagan and Bush were forced to raise taxes.
Alan Simpson, the Republican leader of Obama’s bipartisan deficit reduction commission, had this to say about Reagan:
Ronald Reagan raised taxes 11 times in his administration. I was here. I was here. I knew him. Better than anybody in this room. He was a dear friend and a total realist as to politics.
Yet, the Republicans of today are acting like none of this is true. Even Mitch McConnell, who has made more sense during the debt ceiling debate than others, has been heard spouting this stuff.
“There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy.”
Some of the Republicans even refuse to accept any debt ceiling deal that includes tax hikes when we can see that tax cuts were a main reason we have reached this point to begin with. To add insult to injury, the Bush tax cuts accrued disproportionately to the wealthy. The Tax Policy Center shows that 65 percent of the dollar value of the Bush tax cuts accrued to the top quintile, while 20 percent went to the top 0.1 percent of income earners.
If you want to talk about redistribution, there it is.
Again, some (Republican) Congress people refuse to rescind this monstrosity, holding the economy hostage via the potential for default. This is reckless in the extreme. It is the hallmark of a third-world, banana republic kind of political governance
My take: When you think about the currency debasement and inflation that leads to a hyperinflation that a lot of hard money types are worried about, debt and deficits alone don’t get you there. I know that Morgan Stanley reported that there is “no historical precedent” for exceeding total debt-to-GDP of 250% including the private sector without experiencing some sort of financial crisis or high inflation.
But, the reality is that it wasn’t just the debt, but the dysfunctional government that led to the hyperinflation. The benign outcome for a moderately functional system is the one we saw in Britain whereby the crushing post-World War II debt load was diminished by currency depreciation and inflation without a hyperinflation – wrenching and destructive but not catastrophically so.
The intransigence of those supporting Voodoo Economics and its debunked and bankrupt economic nostrums is prima facie evidence that the US political system is indeed dysfunctional. And so I say to my hard money friends, debt deflation is the flation to fear right now. This is the secular force from excessive debt. However, without changes to reserve currencies another crisis is inevitable and eventually the endgame will be a systemic government debt crisis in the western world.
First the deflation, then the inflation. A loss of faith in government and its ability to tax would be the precipitating factor. And as we watch the debt ceiling fiasco in astonishment, you are witnessing first hand evidence why.