If you’ve listened to the GOP candidate debates, you have heard that the solution to our economic woes is easy. That’s right, easy. All we need to do is reduce spending and cut taxes on the wealthy, who are the job creators.
Of course, there is evidence that this won’t work, but the GOP continues to argue that trickle-down economics is the key to saving Western civilization, anyway. Amazingly, a whole lot of folks who aren’t wealthy seem to be buying this line. Apparently it’s true that if you repeat a mantra like “no new taxes” often enough, people start believing it.
What the GOP offers in exchange for extension of lower marginal tax rates on the wealthy is the promise of investment in innovation, plants and equipment. This, in turn, is supposed to generate economic growth and better-paying jobs. It does sound like a nice theory and it certainly sounds easy. It might even have some merit over the long run – if, that is, if the wealthy cooperate and do what they are supposed to do.
Some argue that tax cuts did work in the 1980s, although they won’t admit that new technology and huge increases in government spending had a hand in things. But tax increases in the Clinton years didn’t reverse expansion, and the Bush tax cuts in 2001 and 2003 evaporated into the economic miasma.
So if they didn’t invest the fruits of the Bush tax cuts in new factories and innovative technology, what the heck did the wealthy do with all that money?
First, they invested in the past. They used the money to buy up existing assets … existing businesses, stocks, bonds, and mortgages. When demand for these assets rose, prices of the securities and underlying assets rose. The stock market boomed. The housing market boomed. Wall Street made money. Bubbles were created. Bubbles burst. But money didn’t trickle down to Main Street.
Second, Wall Street and wealthy investors went on a gambling spree. An exposé last spring on CBS’s “60 Minutes” pointed out that those financial derivatives you hear so much about are just so much legalized gambling. They don’t create factories or jobs (except on Wall Street), but they do create big opportunities for gains and losses. CBS likened derivatives to the betting parlors of the 19th century that were called Bucket Shops. Bucket Shops were outlawed after the Panic of 1907, but financial “reform” in 2000 allowed investors to get back in the legalized gambling business. More bubbles, more bursting bubbles.
Third, the wealthy went on a nice spending spree that’s still going on. While mass retailers like Best Buy, Home Depot, or WalMart have run into headwinds in the recession, upscale outfits like Coach seem to be sailing along.
Bucking the congressional odds this week, President Obama floated the idea of a “Buffet Tax” on millionaires. Some of us agree that the wealthy have not earned their lower tax rates and they should give them back. The resulting tax revenue would help rebuild our crumbling infrastructure and pay down the deficits. Still, the GOP repeats its mantra of “no new taxes,” and lots of voters are falling for it.