Voodoo economics, 21st century
style Son of a Gingrich, grandson of a
Reagan
" Even President Bush's own father dissed
supply- side theory as "voodoo economics." Bush
Senior was right."
sfgate.com.
Stephen P. Pizzo
Sunday, December 15, 2002
When Republicans regained control of both houses of
Congress in November, they won more than bragging
rights. They also realized their best opportunity yet to
enact the twin sacraments of conservative
economics: tax cuts and deregulation. With
Democrats out of power and a new White House
economic team now in place, GOP conservatives
hope they can finally achieve their vision of a low-tax,
lightly regulated economy.
Twice in the past two decades, supply-siders have
tried to prove that a booming economy can be
created by deep tax cuts -- resulting in more tax
revenue -- buttressed by ending mettlesome federal
oversight and bureaucratic regulations.
Unfortunately, the Republicans' attempts to do this
have left taxpayers saddled with hundreds of billions
of dollars of debt, fomented waves of corporate
corruption and may end up costing pension funds
and small investors trillions of dollars.
Nevertheless, no sooner had this fall's election
results been announced than House and Senate
Republicans were proposing additional tax cuts and
lining up to whack away once again at the federal
regulatory apparatus.
Maybe the third time will be the charm. We better
hope so, because current government obligations
already exceed projected tax revenues by over $20
trillion dollars. (Yes, trillion.)
Cutting taxes and reducing regulation have been
central tenets of Republican orthodoxy even before
Ronald Reagan took them prime time.
Lowering taxes is supposed to result in more
investment, growth and jobs -- ("A rising tide raises
all boats," as that famous tax-cutting non-Republican
John F. Kennedy put it.) And deregulation frees
companies from expensive rules leaving more money
for shareholders, expansion and -- jobs. Ruled by
Adam Smith's "invisible hand," businesses are
persuaded to do the right thing because it's in their
own enlightened self-interest.
Liberal Democrats dismiss all this as a sop to
corporate contributors and a tax giveaway to the
wealthy. Even President Bush's own father dissed
supply- side theory as "voodoo economics." Bush
Senior was right.
The first test of these theories came in the 1980s. In
his eight years in office, Reagan slashed taxes by
over $750 billion. He also began deregulating the
financial services sector by signing thrift deregulation
into law. The measure lifted historically tight oversight
of the nation's savings and loan associations, cutting
them loose to prosper by investing their federally
insured deposits in whatever they thought could turn
a buck. It was the most ambitious piece of
deregulation of the financial sector since the Great
Depression.
Reagan thought deregulating savings and loans
would spur home construction and create jobs. It
didn't. And his tax cuts failed to produce more high-
paying jobs or higher tax revenues, which dropped off
a cliff while defense spending soared.
Bipartisan pork kept domestic spending climbing as
well. It was Vietnam-era "guns and butter"
economics all over again. To cover the fall in tax
revenues, Reagan whipped out the National Platinum
Card. By 1987, the United States was the world's
largest debtor nation.
Warning: Political conditions today mirror the Reagan
era. Reagan's popularity among voters convinced
Democrats it was in their best short-term interest to
support his proposed tax cuts.
Back in 1988, I sat through countless hours of
congressional hearings in which members of
Congress -- most of whom voted for thrift deregulation
and/or interfered with later attempts by regulators to
rein in the industry -- pounded the lectern demanding
to know: "Where were the accountants? How could
this have happened right under the noses of auditors
from prestigious accounting firms like -- Arthur
Andersen?"
The answer was clear: Outside accounting firms were
thoroughly compromised. Instead of reporting trouble
at the thrifts they audited, they helped cook their
books, hide bad loans and inflate the value of assets.
They even shredded documents to hide their
culpability. Sound familiar?
In 1989, thrifts were reregulated, to the public's
benefit. But it was a different story for accountants.
There were calls to regulate them, too, but the
industry greased key House and Senate members
with generous campaign contributions. Even after
aiding and abetting the looting of hundreds of S&Ls,
accountants were allowed to continue to
self-regulate.
Congress' failure to place the accounting industry
under SEC oversight in 1989 would cost taxpayers,
workers, pension funds and small investors dearly
over the next decade.
Record Reagan-era deficits and the savings-and-loan
debacle did little to dampen conservative enthusiasm
for lower taxes or deregulation.
In 1994, a new breed of fiscal conservatives swept
into office. House Speaker Newt Gingrich, a Georgia
Republican, ruled under the "Contract With America"
-- a fresh call for lower taxes and "smaller
government." The congressional class of '94 was to
taxes and deregulation what the Taliban were to
Islam -- uncompromising fundamentalists.
President Bill Clinton responded by slipping into his
"triangulation" mode and declaring, to the delight of
conservatives, that "the era of big government is dead
over."
The remark provided a green light for the
deregulators.
Under Gingrich's leadership, House conservatives
mounted repeated assaults on the federal regulatory
apparatus. Because the SEC regulated public
companies, it was second in line only to the
Environmental Protection Agency for congressional
ire. Toward the end of the Clinton administration,
Louisiana Republican Rep. Billy Tauzin used his
chairmanship of the powerful House Commerce
Committee to block then-SEC head Arthur Levitt's
frantic effort to pass a rule requiring big accounting
firms to separate their auditing from their increasingly
lucrative consulting businesses.
Tauzin (who was among the largest recipients of
accounting industry contributions) lambasted Levitt
when he testified before the Commerce Committee
and later threatened to cut the SEC's budget if Levitt
did not drop the matter.
Levitt backed off -- and the time bomb ticked on.
The regulatory vacuum was filled by lawyers. Public
interest and investor groups, unable to get the
attention of federal agencies such as the EPA or
SEC,
turned to the courts. Judges and juries began ruling
for plaintiffs, slamming companies with fines into the
hundreds of millions of dollars.
House conservatives were furious. Unable to
intimidate an independent judiciary, Congress simply
changed the law. In 1995, they passed the "Private
Securities Litigation Reform Act," making it much
harder for private attorneys to get a class-action case
accepted by the courts and reducing the level of
liability faced by corporate insiders, their accountants
and law firms.
It would be six years before the first corporate
domino would fall, but Congress had put in place yet
another cog in the wheels of the corporate crisis to
come.
In 2001, when George W. Bush took office, his first
push was for a $1.6 trillion tax cut over 10 years.
Democrats fell in line after trimming the cuts to a
still-hefty $1.3 trillion. And despite growing concern
over the uncertain future of Social Security and
Medicare, the Bush tax cuts became law.
It was 1984 all over again.
The jury is still out on the Bush tax cuts, but signs
are not good. As with Reagan's tax cuts, less money
is flowing into the federal treasury, new revenues
have not materialized and defense spending has
soared. In less than two years, the $5.6 trillion tax
surplus forecast by the Congressional Budget Office
in 2000 has vanished. The national Platinum Card is
back in use.
On the deregulatory front, those 1994 Contract With
America chickens came home to roost with a
vengeance beginning in December 2001 with Enron's
collapse. Enron was followed in short order by
dozens of other marquee U.S. companies.
Once again, loosened federal oversight -- rather than
sparking innovation, investment and growth -- enabled
an orgy of self-dealing, insider abuse and other
skullduggery.
Earlier this year, I once again found myself listening
to congressional testimony. There on C-Span was
Rep. Tauzin, again holding hearings, this time on the
Enron collapse. More than a decade ago, Arthur
Levitt told him it would happen. Here was Tauzin,
pounding the lectern as he interrogated
representatives from Arthur Andersen. "Where were
your auditors? How could this happen?"
The answer Congress got in 2002 was the same as
in 1989. Even some of the "perps" were the same.
(Arthur Andersen had worked for Charles Keating's
Lincoln Savings.)
One might think such a dismal batting average would
sober up even the most rabid fiscal jihadist. On the
contrary -- even though a recent New York
Times/CBS News poll shows that two-thirds of the
country thinks the money from the now-vanished
federal surplus should have been used to help save
Medicare and Social Security, not subsidize a
trillion-dollar tax cut -- conservatives see their historic
mid-term victory last month as a mandate to finish
the job.
What about the expensive failures of the past?
Conservatives say the only reason things went badly
was that liberals gummed up the works, first by
snookering George H.W. Bush into breaking his
no-new-taxes pledge (he raised them in 1990), and
then by aiding and abetting Clinton during his
eight-year reign.
Diehard conservatives don't give up. This time, they
say, they'll get it right.
Stephen Pizzo is a Sebastopol-based freelance
writer and political analyst. He is the co-author, with
Mary Fricker and Paul Muolo, of "Inside Job: The
Looting of America's Savings and Loans."
sfgate.com |
