Yes, but How?

One of the primary weapons in the Republicans' campaign against stimulus spending is World War II.  The current Republican narrative fights the conventional wisdom that Roosevelt's New Deal stimulus program helped end the Great Depression, instead claiming that the New Deal was ineffective and it was WWII that saved us.  As Rush Limbaugh said on the January 21^st 2009 edition of Sean Hannity's Fox News show:  "FDR prolonged the New Deal for seven or eight years, and yet he's given credit for ending the Depression. Didn't happen. World War II ended it. The New Deal didn't work."

The question I always want to ask when presented with this line of reasoning is: "Yes, but how?"  Whether or not you agree about the effectiveness of the New Deal, conventional wisdom states that it was indeed WWII that ended the great depression once and for all.  If we accept this premise, then the question becomes: How did it work?  By what economic mechanism did the conflict of WWII end our nation's greatest economic disaster? 

The answer is that WWII ended the Great Depression by enabling the government to use vast quantities of taxpayer money to put an unemployed nation back to work at temporary jobs.  In other words, it was the largest government stimulus program in history: the New Deal on steroids.

When a nation is hit by a financial disaster on the scale of the Great Depression, it is forced into a self-defeating cycle.  People lose their savings, so they are no longer able to buy products.  The companies that produce those products lose revenue and have to lay off workers, creating even more people who are unable to buy products.  Rising unemployment leads to reduced revenues which leads to even higher unemployment and even lower revenues.  Without something to break the cycle, this just continues until the majority of citizens are unemployed and the majorities of businesses are bankrupt.

WWII presented such a boom to our economy because, after being isolationist since WWI, the US was completely unprepared for war.  We needed to start more or less from scratch producing all of the material required for war, from tanks to rifles to uniforms to rations.  To produce all of this material, the government needed to open up many of the closed factories and put many of the unemployed citizens back to work.  Because the cause was national defense, the government didn't need to worry about objections to using taxpayer money or building deficits, but the economic mechanism for recovery was exactly the same as the New Deal. 

Without government help your local factory is shut down and you're living in a tent city with no way to find work.  When WWII breaks out, the government uses taxpayer money to reopen the factory and put you back to work in it producing tanks.  A few years later, the war is over, there is no longer any need for you or the factory to produce tanks and the tanks you spent the war producing are rusting in a field in Europe.  It would seem that nothing permanent came from the war stimulus and that things should go right back to the way they were, but they didn't.  While the war didn't produce new jobs or businesses, four years of government stimulus had put spending money in people's pockets.  It had given business owners the resources they needed to reopen their shops and customers with the money to shop there.  It had broken the cycle, allowing the economy to begin driving itself without government involvement.

As a war, WWII was a righteous cause.  As an economic mechanism, it was exactly the same as paying people to dig holes and then fill them back up.  On both counts, it was a great success.

If you believe that WWII ended the Great Depression, then you believe in the effectiveness of stimulus spending.  When looking for the way out of our current Great Recession, we have WWII as an example of what  happens when the government steps in with large scale stimulus spending and Japan's Lost Decade as an example of what happens when it doesn't.  Financial debacles of this scale produce the only set of circumstances where trying to balance the budget is fiscally irresponsible.  In our current situation, we will never be able to cut enough to make a dent in the budget.  Realistically, the only way to reduce the deficit is by repairing the economy and the only proven method for repairing the economy is stimulus spending.

The Tea Party vs America

The Tea Party makes good TV.  It has anger and costumes and members at its fringe who redefine the word "fringe".  Unfortunately, all of the sound and fury distracts us from the core values that drive the movement.  When you boil away all of the drama, it seems that Tea Party members believe that they are not receiving their legal representation from the federal government, making them victims of tyranny and entitling them to start a revolution for freedom patterned on our founders' revolution against the British.  Unfortunately, the only way to believe this is if you are painfully misinformed about the Constitution and our nation's history.  The sad truth is that none of what the Tea Party members face qualifies as tyranny and that what the Tea Party is actually protesting is American Democracy.

The American government, as structured by the Constitution, is a representative government.  This means that citizens do not directly vote on legislation.  Instead, every two years we go to the polls to vote for representatives who will then vote on our behalf.  Once we elect a representative, they are free to act as they see fit.  If voters feel that they are not being well served by their representative, they can protest the representative's actions and try to get them to change their policies.  Failing that, citizens next course of action is to wait for the next election and try to vote the offending representative out of office. 

Nowhere in the Constitution are representatives required to follow opinion polls and always vote in a accordance with what's most popular amongst their constituents.  Ironically, Republicans were very clear on this issue when George W. Bush's poll numbers showed that around 70% of Americans disagreed with his policies and felt they were being poorly represented by him.  At the time, they declared that the presidency was not a popularity contest and considered the President brave for ignoring public opinion and sticking to his guns.

Sadly, these days even the Republican mainstream seems to have forgotten the true nature of American democracy.  In their new "Pledge to America", Republicans say that "In a self-governing society, the only bulwark against the power of the state is the consent of the governed, and regarding the policies of the current government, the governed do not consent."  This statement is, in a word, false.   In America, the primary bulwark against the power of the state is the right to vote.  If you voted in a free and fair election, then you are being represented to the fullest extent required by the Constitution.  No matter how strongly you disagree with your representatives, you are not the victim of tyranny and you have no claim to the right of revolution.

Much has been made of Jefferson's comment on revolution and " the blood of patriots".  Unfortunately, no one mentions the most critical part of that statement, which is not what he said but when he said it.  Jefferson wrote this in a letter in 1787, after the revolution but before the new Constitution was ratified and its key amendments written.  In other words, he said it before our great American system of government existed.  America's greatness comes from the system laid down in the Constitution, an elegant system which guarantees both individual freedom and the peaceful transfer of power.  As long as America's politicians hold to that system and the people retain the right to vote, revolution can only be an attack on America herself.

When our founders said "taxation without representation is tyranny", they were saying that "the monarchy that controls my country is taking my money in taxes and providing nothing but brutal repression in return".

When Tea Party members say "taxation without representation is tyranny", they are saying that "my democratically elected government is enacting policies that I disagree with".

Clearly, there is no parity between these two statements.  When you boil away the sound and fury, the Tea Party is a group of people who are angry that we had an election in 2008 and the other guys won.  In other words, the Tea Party is a movement of people who are bitterly angry at American Democracy.

Who's Laffing Now?

As we reach the climax of the 2010 election season, the Republicans have released their new "Pledge to America".  Not surprisingly, the economic portion of the pledge centers on tax cuts designed to stimulate the economy, increase revenues and reduce the deficit.  However, unlike most political pledges based on untested rhetorical ideas, these sorts of tax cuts have actually been the subject of exhaustive testing.  These are the same tax cuts we have seen in action over the combined 16 years of the Ronald Reagan and George W. Bush administrations.  In 2010, the tests are complete and the results are conclusive: tax cuts to the wealthiest Americans do exactly what you would expect them to do - lower tax revenues and raise deficits without stimulating the economy in any way. 

So why do we continue the debate as if the tests hadn't been run and the truth determined?  The answer lies in the myth of the Reagan Administration.

It all began with the Laffer Curve.  In 1974 economist Arthur Laffer attended a Ford Administration strategy meeting also attended by Dick Cheney, Donald Rumsfeld and several others.  At the meeting, Laffer argued against Ford's proposed tax increase by presenting what became known as the "Laffer Curve" (although the concept has been around for centuries - Laffer himself attributes it to the 14th century Muslim scholar Ibn Khaldu):

Legend has it that this curve was first presented the modern Republican party on a cocktail napkin, which Laffer used as scratch paper.  The curve has two data points:  1) if the tax rate is zero, you get zero tax revenue, 2) if the tax rate is 100 you also get zero tax revenue, since working would provide no more income than not working.  A curve is drawn between these two points, creating the theoretical concept that raising taxes raises revenue up to a point, after which it actually lowers revenue by discouraging productivity.  This concept remained theoretical and untested until the Reagan Administration.

When Ronald Reagan took office in 1981, the top tax rate was 70%, which Reagan cut to 35%, and tax revenue did, in fact, go up - bringing us to the myth. 

Under the Carter Administration taxes were high, but also full of loopholes.  Almost nobody in the 70% bracket actually paid that much, since they could afford accountants who could find tax shelters to hide their money from the government.  In fact, most of the wealthy in the 70's were so good at finding loopholes that they didn't pay any taxes at all.  When Reagan took over he lowered taxes, but he also closed the loopholes, so on paper it looked like he lowered taxes on the wealthy form 70% to 35%, but in reality he raised taxes on the wealthy from 0% to 35%.

The myth is that Reagan raised revenues by lowering taxes.

The truth is that Reagan raised revenues by raising taxes.

This pattern was confirmed in the George W. Bush Administration.  Without the distractions of absurd 70% tax rates and complicated loopholes, we were left with the simple math that, when the top tax rates are set at a reasonable level (around 40% in this case), lowering taxes does exactly what you would expect it to do: it lowers revenues and increases deficits.  Ironically, this is exactly what the Laffer Curve predicts.  The curve is traditionally drawn with the tip of the bell at 50%, which means that at any tax rate under 50%, lowering taxes should lower revenues.

Unfortunately, tax cuts have gone on to become the cornerstone of Republican economic policy.  The idea is that tax cuts, especially those to the wealthy, cause the wealthy to spend more personally and to invest more in business, which creates jobs and stimulates the economy, which increases tax revenue and lowers the deficit.  It would be lovely to live in a world where this idea could work, but unfortunately we live in this one.  In this world we have tested this idea and, once again, proved it false. 

In 2001 and again in 2003, George W. Bush passed a series of tax cuts, which lowered the top rate to 35%.  Over the next seven years, we saw deficits skyrocket and the economy flounder.  Although the weak economic  numbers were artificially inflated by the sub-prime mortgage bubble, that bubble burst in 2008, sending us spiraling toward the next great depression.  The tax cuts remained in place though all of this and continued during the first two years of the Obama Administration, where they have shown no sign of stimulating the economy or aiding in the recovery while they continue to add to our debt.

Despite this, these tax cuts remain the cornerstone of the Republican's new Pledge to America.  They claim that these same tax cuts, which have done nothing but grow the debt over the last 7-9 years, will suddenly start producing results if they are renewed.

Instead of just taking the politicians' words for it this time, why don't we look at the tests, review the results, and decide for ourselves?