It was President Obama who stated that President Reagan was a transformative president. One of the ways this statement rings true is captured by three expressions: "Starve the Beast", a theory voiced by Alan Greenspan in 1978 and championed by President Reagan in early 1981. (See Economix.) Second, "Reaganomics" and is an economic model that bears President Reagan's name. Third, " ... the government is the problem."
The beast might be a derisive term for government; hence 'starve the beast' implies making the government anemic, and employing deficits to justify cuts in government expenditures on social programs. The concept has morphed to include a broader goal of cutting government-spending activities such as closing the Education Department, EPA, and the Energy Department. How to justify this? Taxes are the beast's life-blood needed for sustenance. Therefore, President Reagan, a staunch adherent of starve-the-beast, cut the marginal tax rate from 70 percent to 28 percent. However, the federal debt went from just under $1 trillion to about $3 trillion in a few years.
Tax cuts have become so ingrained in the body politic that an utterance such as "Read my lips, no new taxes" is political harikari. This isn't an argument by a single anecdote. Recently, Senator Sanders had a proposal that would have created millions of new infrastructure jobs. It was rejected by Congress over jurisdictional turf on dealing with loopholes to pay for them--those new jobs. The plan to pay for the jobs was quite simple: closing "absurd loophole" that allowed businesses to operate offshore, thereby accounting for a loss to the Treasury of approximately $100 billion a year. (See USA Today.)
Clearly in some political quarters, the catechism on deficit redemption does not include higher taxes--that would be venal. The solution can only be to cut spending even when the evidence shouts loud and clear that that does not work. In Kansas Gov. Brownback's experiment in Reaganomics has led to more deficits. The same narrative is true of Wisconsin under the leadership of Gov. Scott Walker. The governors' actions might been done on purpose if their goal was to reduce the size of government. On the other hand, in Minnesota Gov. Mark Dayton raised taxes and created a surplus of $1 billion. A piece in the StarTribune by Ricardo Lopez alleges: "State budget officials said Thursday that the surplus is the result of higher tax revenues, mainly in sales and individual income-tax collections, and reduced spending in health and human services." Accepting the ACA and expanding Medicaid did not harm the Minnesotan economy--unemployment is below the national average. For ideological reasons, red states seem content with the reasoning dissonance associated with the starving-the-beast theory. Deficits, however, would give some governors cover to cut programs that Americans like: Social Security and Medicare, for instance, even when those cuts would impose great burdens on people who can least afford them--the poor.
When the government cuts benefits for the poor, they in effect raise taxes on them since the poor would be forced to spend a higher percentage of the income on the goods they consume. To put this in perspective: from 1980 to 1988 the top marginal tax rate fell from 70 to 28 percent, which was a 42-percentage-point drop. Someone with a top marginal income of $1,000 saw her tax liability fall from $700 to $280, representing an increase of 60 percent in top disposable income. This income boost would be expected to find its way into new investments. Instead, it is often spent on luxury yachts, cars, apartment, houses, and vacations. In the same period, the bottom marginal tax rate rose from 0 to 15 percent: Think of the implications for economic growth.
Reaganomics is based on reducing the size of government through lower taxes and government spending, cuts in capital-gains taxes, reduction in the money supply to combat inflation, and fewer regulations on business and the environment. Reaganomics caught on as an idea--it is called liberal economics in Europe and, for conservative-leaning governments in places like the UK and Germany, it is the "Holy Grail." Reaganomics leaped over the pond and was embraced with ferocity--for instance, the intransigence of European creditors (ECB, EC) led by Germany's Chancellor Markel in bailout talks with Greece and the surprising Tsipra's capitulation to more brutal austerity demands that will harm the country in years to come. Reaganomics is in the marrow of political thought in the U.S. (with some powerful members of Congress) and it has been put in practice in a number of states with dubious results.
"The government is the problem" was a game changer. This charge had resonance with Americans because it came on heels of a decade of apparent national government incompetence. The oil crises of the 70s, which started in October 1973 (see Transmissions for a discussion), caused the price of gasoline to jump from 25 cents a gallon to over $1 in a few months. The Iran Hostage Crisis (November 9, 1979) involved about 60 Americans held hostage in the U.S. Embassy in Tehran for 444 days; and the Vietnam War came to an end with the Paris Peace Accords on January 23, 1973. This protracted war took an enormous toll the U.S. in terms of human life: "During Vietnam War, the United States suffered 58,119 killed, 153,303 wounded, and 1,948 missing in action." (From Military History.) Hence, when President Carter said there was "a crisis of confidence" because of inflation and high interest rates, he added to the downbeat mood and a feeling of hopelessness in the country.
Fast forward to 2015. The country faces low inflation, "high" unemployment (5.3 percent), near-zero interest rates, flat wages and high profits and the excesses of the "Roaring Twenties" including gaping income inequality. Enabling liberal economic policies foreshadowed the 1929 Great Depression. Today's income inequality and liberal (Reaganomics) might preview the advent of another crash.