Voodoo Economics (Part II - Final) An often repeated claim by conservatives is "Lower tax rates increases tax revenues". On the face of it, one cannot refute the actual numbers. This occurred in the Kennedy administration. So conservatives keep repeating this mantra. This has been repeated on this site more often than many would care to read. So what is wrong with this? Answer - PLENTY. If only lower tax rates increases tax revenues by stimulating the economy, that would be great! However Republican administrations and conservatives, using this cliche, have been pulling the wool over our eyes. So why is it wrong when Republican administration use this economic philosophy? Answer: The Government resorts to reducing taxes and relies on "Borrow and Spend". As stated in the prior post on this thread, President Reagan, used the Supply Side economics and believed in the Laffer Curve. He had a 40 percent increase in defense spending and the Federal debt in his eight years tripled going from 700 billion-dollars to 3 trillion-dollars. Contrary to the "Supply Side theory" the Reagan government revenues decreased by 1 percent. http://en.wikipedia.org/wiki/Reagan_(president)
So what is wrong with that? Is not that better than the "Tax and Spend" Democrats? I am no expert on economics. But recently this was explained to me. When govt spends, the money goes to individuals as payment for goods and service. The former transaction generates a sales tax; and the latter generates income tax and many other taxes (payroll, social security, etc). The money the government pumps into economy creates a 'Ripple Effect' as this money circulates through the economy and population. This in-turn repeatedly generates income tax, sales tax, etc, etc. It is estimated that the govt takes back in taxes about 60% of the amount the government pumps into the economy. As an example: When the govt does not pump money into the economy, it would get back nothing in taxes / revenues. So the govt borrows 100 dollars from the Chinese to pump into the US economy and collects 60 dollars (as increased tax revenues). The problem with "Borrow and Spend"; which Republican administrations do (through deficits), the govt may get back sixty dollars. But it still owes the Chinese one hundred dollars plus interest on that borrowed money. The increased tax revenues (if any) has nothing to do with lower tax rates. It has all to do with increased govt spending. And it is a disaster when that govt spending is "borrowed" money. So since Ronald Regan the administrations have cumulatively bankrupted the USA; and "WE" the otherwise "patriotic Americans" have transferred American wealth overseas as international debt. Reagan was supported and cheered for his economic policies by Americans-at-large by being re-elected; winning in 49 of the fifty states. The voodoo economics of the Federal Govt is compounded by similar economic principles adopted by many corporations. The Principle: "Spend money the corporation does not have." And in many cases "the money the corporation did not borrow." The best example was Bear Sterns which had 36 dollars in debt for every dollar in asset. The "money" was a "number entered on the books." A similar scenario was seen with Enron, Worldcom and many others. The govt. loves what these corporations do, including the exorbitant pay scales of the top management. All this "phantom money" (stock options, etc) and "creative financing" only generates more taxes for the govt. and grows the GDP (Gross Domestic Product). The sub-prime mortgage is another version of 'Voodoo Economics on steroids'. Here individuals bought homes with money they do not have and cannot afford. They were facilitated by bank-lenders, backed by several institutions along a vertical chain, who lent money that, these institutions did not have. Among new tricks the accounting wizards use to create 'phantom money' are "Credit Default Swaps" and other creative financial instruments like "Derivatives." http://en.wikipedia.org/wiki/Credit_default_swap Borrowing money, spending and living like a rich person does not make the person rich. In fact this makes the individual more poor. Because now there is the debt as well as interest on the debt that has to be repaid. Sooner or later the "chickens come home to roost." Greenspan was appointed by Reagan as Federal Reserve Chairman and served for eighteen and-a-half years. He stepped down in 2006. In his recent testimony to Congress, Greenspan called "the Banking and Housing chaos a 'once-in-a-century credit tsunami' that led to a breakdown in how the free market system functions. And he warned that things would get worse before they get better, with rising unemployment and no stabilization in housing prices for many months." Sorry to paint a jaundiced picture of Voodoo Economics. "Phantom" conservatives have been feeding us that "Supply Side" theory of Federal deficit spending is all ROSY. Republican Presidential candidate Ron Paul would likely reply, "Nice Try." Individuals who insists that "Borrow and Spend" is a good economic policy, would be better off taking a 'Chill Pill.' Regards, Gilbert Lawrence,
