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News-Sentinel.com Your Town. Your Voice.

LETTER TO THE EDITOR: How does government become corrupted?

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.The Associated Press
Monday, September 11, 2017 08:26 am

In July, “Americans for Prosperity” published “How bold tax relief powers economic growth.” This document makes multiple fatuous claims about the supposedly miraculous effect of tax cuts on tax revenue, GDP, employment and incomes.

According to the CBO, unadjusted revenue growth during the Reagan administration was $392 billion. Was this a tax cut miracle? Increased social insurance taxes account for $177 billion of this amount. There were tax increases in 1982, 1983 and 1984, most notably the Tax Equity and Fiscal Responsibility Act of 1982.

According to Bruce Bartlett, TEFRA raised $37.5 billion per year for four years, a total of $150 billion. The Deficit Reduction Act of 1984 raised another $60 billion for a total of 177+150+60 = $387 billion of the Reagan revenue gain was due to either social insurance taxes, or tax increases. The remaining $5 billion was the tax cut miracle.

How does one analyze the Bush2 tax cut? According to Libertarian Chris Edwards, the key quantity is the top marginal tax rate. A low tax rate is claimed to stimulate entrepreneurialism and investment. The most important metric of business investment is core capital goods.

According to the Federal Reserve Bank of St. Louis, the mean growth rate of core capital goods spending for the Bush2 administration was 4.03 percent per year, much less than the rate of 6.95 percent during the Clinton administration. Since the growth rate of business investment during the Bush2 administration fell by 42 percent, where did the Bush2 tax cut miracle come from?

In June 2003, the Federal Reserve cut the Fed funds rate to 1 percent, the lowest since 1961. According to the Mortgage Bankers Association of America, monthly subprime loan issuance increased from 18,000 in the second quarter of 2003 to 450,000 in third quarter. The connection between these two events was described by CNBC's Gary Kaminski on April 13, 2012: The Fed rate cut to 1 percent made the securitization economics work for the first time. Then the subprime bubble blew up like your car's airbag in a head-on collision: according to David Stockman, “Wall Street had functioned like a giant financial vacuum cleaner, sucking the worst of the subprime and exotic mortgages off the balance sheets of local community lending institutions and into the billion-dollar securitization pools assembled on Wall Street.”

The Bush2 “snapback” recovery was nothing but the subprime bubble. Mortgage Equity Withdrawal was one of the most poisonous pieces of financial engineering invented during the bubble. MEW permitted homeowners to refinance their homes at inflated home prices and take out cash. According to Stockman, cumulative MEW over 2001 to 2007 was nearly $5 trillion. According to Barry Ritholz, MEW was responsible for 75 percent of GDP growth from 2003 to 2006. The claimed Bush2 GDP miracle of 3 percent, when you deduct the effect of MEW, actually works out to 3*(1-0.75) = 0.75 percent. The notion that borrowing money against the inflated value of your home and then blowing it on consumer goods, is healthy economic growth, is a testament to the incompetence and perversion of “Americans for Prosperity.”

The dishonest character of the AFP document is better understood when one notes the absence of any comparative economic analysis. Here is the comparative analysis of the 10-year revenue gains in billions (2009 dollars): Kennedy: 283, Reagan: 400, Bush2: 227, Clinton: 859, Obama: 323. Here is the comparative analysis of eight-year (unprimed) GDP: Reagan 3.6; Clinton 3.8; Bush2 1.80; Obama 1.85. Here is the comparative analysis of eight-year employment: Reagan +16.1M; Clinton +22.9M; Bush2 +1.3M; Obama +11.5M. Here is the comparative analysis of eight-year real median household income, which is the correct metric of income growth: Reagan +4,050; Clinton +7,065; Bush2 -2,414; Obama +1,140.

“Americans for Prosperity” is an intrinsic part of the new model of political corruption in the 21st century. This model is based on Jean-Jacques Rousseau's assertion that to make radical political change, one must not only control the actions of the people, but also their will.

Hank Achor

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