Modern tax politics began in 1978 when California voters approved Proposition 13. The bill was written and sponsored by Howard Jarvis, a small-town newspaperman, then political wannabe and lobbyist, co-sponsored by Paul Gann, an occasional political ally. During the run-up to the election, municipalities throughout the state sought to hedge their bets by dramatically raising the property tax rates, presumably to increase the base from which they would then be lowered. In so doing, of course, the success of the proposition was ensured.
In addition to lowering the tax rates, (in L. A. County property tax rates were cut by close to 70% from their swollen peak), the bill mandated that future tax increases would require a two thirds majority from voters. This resulted in two major, long-term consequences: 1) the state was forced to step in to help counties finance their major expenditures, putting the state, as well as the municipalities under financial stress; and 2) it placed a significant amount of inertia in the residential and commercial real estate markets because taxes, under the bill, could only increase by 2% per year. People selling and buying property would face substantial increases in taxes from new assessments.
Since it appeared that the proposal would hamstring governments all over the state, the legislature hastily passed a counter measure which stood as Proposition 6. Prop 6 had a much more balanced and workable framework to deliver relief to homeowners without the dire consequences of Prop 13. This was actually pretty good legislation; but with Jarvis, money and significant marketing forces behind it, Prop 13 ended up with a larger vote and carried the day.
Proposition 13 started what we now think of as the “tax revolt” of primarily the upper-middle class, which resents “entitlement” programs for the lower classes, but which fails to recognize the vast array of costly government services that they receive. From a demographic standpoint this group can pull off this kind of coup because their voting turnout is much greater than the lower classes.
Ronald Reagan, a former governor of California, and political ally of Jarvis began his second quest for a Presidential nomination shortly after passage of Prop 13. Recognizing the potential for populist support, he ran a campaign promising not only fiscal responsibility, but also tax cuts. Reagan’s economic plan, dubbed “Voodoo Economics” by his Republican rival, George H. W. Bush, was buoyed by Milton Friedman, leader of the “Chicago School” of economics, who broke from his Keynesian roots to advocate “Supply Side”. Supposedly, by lowering taxes, people would invest their surplus income in productive enterprise, producing jobs and prosperity. Sounds good on paper. Reagan won the election. (Ironically, as governor, Reagan had inherited a troubled state budget and quickly turned it around with substantial tax increases. One might have anticipated that he would follow his own previous pattern of leadership.) As president, Reagan delivered on his promise to substantially reduce income taxes, but fiscal responsibility was abandoned and he matched the tax cuts with large increases in spending and government programs. (Friedman advocated “smaller” government.)
Buoyed by the fiscal stimulus of huge government deficits, the economy of the eighties grew dramatically, as predicted by the Keynesian model. This was “credit card prosperity”. But deficits which had held around the $30 to 50 Billion dollar range since the Viet Nam war of 15 years earlier ballooned to $200 to 250 Billion range. With the heady appearance of prosperity, Reagan’s hypocrisy and break from Republican tradition was forgiven and ignored.
Vice President, George H. W. Bush, who initially mocked his boss’s economics, after seeing the political advantages of such “populism” adopted the formula for his own policy and was elected in 1988. When he violated doctrine with a tax increase in 1992, he was vilified, repudiated by the party and lost to Bill Clinton.
Clinton followed up on Bush’s tax increases with his own in ’93, and rode the wave of the electronics boom to prosperity and budget surplus. But lurking in the shadows was George, Son of Bush, still promising the Republican mantra of tax cuts. After his appointment to office, we have watched the collapse of the economy, as government budgets have borne the fruit of profligate spending and ballooning debt. In 1980 when Ronald Reagan took office, he inherited $950 Billion of government debt, (or), (or). [The United States was also a creditor in international accounts.] That was $950 Billion accumulated over the 192 years of our history. Twenty-eight years later, after twenty years of “Reaganomics”, we observe the ruins of our economy, $10 Trillion! of government debt, and enormous outstanding foreign holdings of our currency from trade imbalance. Yet Reagan has become venerated as the iconic father of the modern GOP. Republicans love him because he said things that made us feel good (“Morning in America”), and hit on a formula for getting elected. They don’t seem to worry about responsible leadership.
While practitioners of Reaganomics pledge not to raise taxes, "borrow and spend" leads directly to inflation. Inflation is a tax in all but name, the most regressive tax of all. Tax cuts go to the rich while inflation consumes purchasing power. Poor people spend virtually all their income on consumption goods. Poor people generally don't vote, and they don't understand what's hitting them. This is a good formula, but it's inherently dishonest.
So what can we make of this; and what can we expect from our new incoming president? There has been much made of the comparison between Mr. Obama and Abraham Lincoln. Let’s look back and see what jumps out.
The election of Lincoln, an avowed abolitionist, sparked the secession of the Southern States, which occurred by the time he assumed office. War began a month later, with General Lee defecting to the Southern cause. Lincoln countered with General George B. McClellan, as commander in chief of the “Army of the Potomac”. Certainly the state of the union in 1861 was every bit as troubled as what we face today.
McClellan was a meticulous man; his army was well manned and well trained. But war is messy business. He had a knack for over-estimating the strength of enemy forces, while under-estimating his own. Consequently in the early stages of the war, McClellan retreated under fire from inferior forces, failed to capitalize on advantage in battle, or (usually) avoided engagement altogether. As you might expect, he was very popular among his troops. He kept the vast majority of them alive, well trained and well fed. After failing to secure a decisive victory at Antietam, Lincoln, not content to wage the war on parade grounds, fired him.
McClellan’s approach to fighting war was very similar to modern Republicans’ approach to governing. In providing never-ending tax relief, from Reagan to John McCain, Republicans have offered up a safe formula for popularity, for getting elected. But it’s not a formula for leadership or to forge a prosperous future for our country, any more than McClellan's strategy would win the war. Until the last few months, our economy has muddled on, based on debt and pyramiding corruption. But now, (fortunately) at last we may find ourselves at the crossroads from which we must make the difficult choices, to start paying our bills and right our economy. There has been much talk recently of the "Bush legacy", and it's possible that the legacy will be that he made things so bad that we were finally forced to make these difficult choices.
The closing chapter in the McClellan saga is that after being fired, he opposed Lincoln as the Democratic nominee in 1864, promising to appease the South and end the war. Lincoln, of course, won the election, but was assassinated a month after inauguration, bringing Andrew Johnson to power. Until recently, Johnson was considered our worst president. We must check with history on that.
So why is our economy on the verge of collapse? How have things gotten so bad? If you travel in Poland, you're going to be using zlotys. At approximately 3 zlotys to a US dollar, it's inevitable that when you are preparing to leave the country, you'll look around for something to do with a couple hundred zlotys you still have. If you bring them home and try to buy something in a store with them, the clerk will look at you quizzically and ask for dollars. If you take your zlotys to your bank, you'll be lucky to get $25 for them, not enough to warrant the hassle. On the other hand, when a Polish visitor to The United States returns home with a pocket full of dollars, any merchant in Warsaw is delighted to grant him a fair exchange rate in accepting this as payment for merchandise.
Is this good? Well, it's very handy for us. But when you consider that on the world market our currency is also accepted as an alternate exchange almost anywhere, and dollars are used for international debt resolution, and foreigners are eager to buy dollars for investments, thereby financing our debts, it presents a knotty problem.
When we see troubled economies around the world, the common advice (from our government) is a serious dose of financial restraint, accompanied by a period of belt-tightening for the people on the road to recovery. If that government prints additional currency to pay the bills, runway inflation usually consumes the economy, leading to collapse of the currency and economic disaster. But after WWII, when we were both the economic, and the manufacturing, powerhouse of the world, our products and currency became world standard. This worked out fine until Reaganomics came along and we stopped paying our bills. Since our currency was accepted everywhere, the government discovered that they could run large deficits in budget and in trade without quickly triggering the high inflation and interest rates which any other country would face. This has continued now for 25 years while the world has essentially offered us a massive credit card on which to run our economy. In the meantime, with runaway debt, runaway greed, politicians who have convinced us we don't have to pay our bills, the financial services' collapse from CDSs and CDOs (the subject of a coming piece), a president whom we have allowed to scuttle or emasculate our regulatory agencies, our disappearing manufacturing base, runaway demand for oil that we don't have, and the emergence of new economic powerhouses, the world is having second thoughts about continuing to finance our binge.
The bottom line is that for a generation now we have been spoon-fed rosy formulas for prosperity and consumption which look like they are about to come to an end. We will face "the serious dose of financial restraint, accompanied by a period of belt-tightening for the people on the road to recovery" that any other country must endure to keep our ship afloat. We can't expect miracles from President Obama or anyone.
Considering that Lincoln was the first Republican president, it’s fascinating to observe the juxtaposition of the two parties. Lincoln’s Republicans stood for leadership, solvency, civil rights; they took the road less traveled and heavily rutted. Today’s Republicans stand for “borrow and spend”; they pander to our weakness while welcoming the bigoted and intolerant that Lincoln’s Republicans eschewed. At the same time, they paint themselves into an electoral corner from which it’s almost impossible to govern responsibly. It will be interesting to watch how the party responds to the repudiation of George W. Bush and failure of McCain’s appeal to "Reaganomics" to carry him to victory in this past election.
In future elections, when a candidate focuses on promises to lower taxes and accusing his opponent of intending to raise taxes, be aware that may be accusing his opponent of being a responsible politician.
Who wrote this piece? It's not bad.
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