Bushenomics 102: Reality

by Larry Beinhart

There were two stories in Saturday's New York Times that reveal the reality of Bushenomics.

One said that Delta Airlines was going to eliminate its pilot pensions. It was in the business section, page C3.

"Where Did the Good Investments Go," was the headline on the other one. It was an editorial. It said, "By and large, American companies are flush with cash," and have been for some time, but they can't find productive places to put the money.

Those of you who are reading this have been living through Bushenomics 101. The theory is that if you cut taxes for the wealthy they will go out and invest it. That will grow the economy and create jobs.

In the past it's been called trickle down theory and voodoo economics.

The first thing that happened utilizing this theory was a recession. Bushenomicers blamed it on Clinton.We have had a slow recovery. Bushenomicists blame it on Clinton, on 9/11, and the subsequent wars. What George Bush fondly calls the 'trifecta.'

The first of these is odd because under Clinton the economy grew like gangbusters. It produced jobs, the Dow Jones went up over 350%, the deficit left by Bush the Elder turned into a surplus. So Clinton policies should have been a perfect 'how to." The second was reasonable, but only for a brief period. A month, two months, perhaps a quarter. That's all. The third is absurd. War normally produces growth. All around growth. Including jobs.

The so-called recovery has been treated as very mysterious. First, because it did not produce jobs. Now, because it is not producing business either. Yet it has produced an increase in corporate profits and a great rise in the real estate sector.

If you just take the facts and forget about the fantasy, there's nothing mysterious about any of it.

The great bulk of the tax cuts went to rich people. If someone making a million a year gets to keep an extra hundred thousand, what do they do with it? Go out and start a company? No. They put it in the stock market or real estate. In this case, business has not really been growing. The Dow is still only a few points over where it was when Bush took office. Other factors, like low interest rates, favored real estate. So the money flowed there. But how can we say that business is somehow bad if corporate profits have risen?

With tax cuts, massive spending and wars, Bushenomics does pump a lot of money into the economy. But what Bushenomics doesn't do is create places for the money to go. It does not enrich the vast mass of working people who are the ultimate consumers, so their spending does not increase.

Actually, as wages are driven down, pension funds are under funded or looted, public services are cut and the public debt is increased, it means that the money Bushenomics is spending is from the general population. In that circumstance, corporate profits are not so much profits, but a transfer of value and productivity into cash. It is a sort of hollowing out of our businesses and indeed of the entire country. It's a big country with a lot of money, a lot elasticity, a lot of creativity and a lot of variety. So this can go on for a while without a major crash. Plus the world depends on American consumption, so the rest of the world will go along with it. For a while. But the reality is beginning to appear.

It's like sighting of icebergs. A glimmer here, a shining there. While the band keeps playing in the ship's ballroom.
Part of the problem is the media.

For example, the Delta story, which involves the pensions of 13,000 people, could be considered a major break in the social fabric. As such, it would be an A1 story, a front page story, not a C3, business section story.

Also, the Times headline was "Delta Takes Steps to Avert Mass Retirement of Pilots."

That wasn't false, but it was a hell of a spin on the story. Pilots were entitled to a lump sum payout of half what they were due. The writing on the wall is in very big letters, a lot of them were going to get out while the getting was good, creating something like a run on a bank. But you don't stop a run on the bank by shutting it down forever, and devil take the people with money on deposit.

The enormity of problem also tends to remain hidden because we don't have a counter narrative.

That's a shame. Because the counter narrative is simple, sensible and it works.

Call it trickle up economics.

If a bunch of average people have money to spend, business people will arrive to sell them things. That is a law of nature. They will trade and build and invent in order to do so. If they get rich in the process, God bless them.

It could also be called the miracle of Henry Ford. Ford understood that it was not enough to create affordable cars, he had to create workers that could afford them. So how do you do that?

If the government is going to cut taxes to stimulate the economy, they have to cut at the bottom end. Those people will spend their entire cut on goods and services. The delivery of goods and services creates more business and more jobs. If that happens - and it more or less has to - there is a multiplier effect with taxable income and spending created at each multiplication point and it can go around so many times that it actually does create more revenue than the tax cuts costs. That's classic Keynesian theory and that's essentially what happened under Clinton.

You don't really have to cut at the top end.

Let's say a businessman has an opportunity to make a million dollars, but he'll have to pay taxes of $500,000. Will that he pout and say, I don't want that half a million if it means giving the other half to the government? If he does, someone else who thinks half a loaf is better than no loaf will step right up. How high can taxes go before people stop working, as conservatives claim they will? I don't know, but I do know that the marginal tax rate in the 1950's was over 90% and business boomed. I am not advocating that rate. I'm simply pointing out that it didn't stop free enterprise.

If the government is going to spend in order to stimulate the economy the way to do it is to invest in infrastructure. The basic example is a road. Governments build roads. Roads cut costs, cut time, increase productivity and profits, they are an invisible subsidy of all the businesses that use that road and all businesses that do business with them.

Infrastructure is not just physical. It includes education, a reliable court system and a reliable regulatory system.

Today, the greatest need for infrastructure is in health care. Other countries have national health care systems. America's health care system is inefficient, costly and business based. That's making American workers and companies that actually do their business in America non-competitive.

Another form of infrastructure is research. If America is ahead of the world in non-petroleum energy technology, we will stop draining money out of the country and have knowledge - and perhaps even energy - to export.

It is possible to stimulate an economy by spending on war. That's credited with taking America out of the depression. But if it's done by accumulating too much debt, as opposed to raising taxes, it can leave the country bankrupt and crippled by debt like Britain after the Second World War. Welcome to Bushenomics 102.

It's where reality pops up. And reveals Bushenomics 101 to have been a fantasy under which a small group of people got to loot the wealth of the whole country.

The question is what we will create for our post-graduate course: After Bushenomics: Rescuing America.