Friday, February 24, 2012

Deja Voodoo All Over Again*

In the 1980 Presidential; campaign, George H. W. Bush labeled Ronald Reagan’s economic proposals “voodoo economics”.  Bush attacked the claim that sharply reducing corporate taxes would encourage so much additional investment that the resulting economic expansion would more than compensate for the huge loss in tax revenue.  The logic of this proposition is now enshrined in the infamous Laffer Curve (more appropriately spelled Laugher).

This was the beginning of supply-side economics based on the general principle that giving business everything it wants – from tax cuts to deregulation to cheap labor – will stimulate productive investment, lift all boats, and produce trickle-down effects.

This supply-side logic is now enshrined in almost every economic policy proposal in one form or another. In spite of the lack of empirical support and the accumulated misery and crises that these policies have produced for the majority of workers, it keeps coming back with a vengeance.  The simple and intuitive logic is so compelling it has become immune to economic facts.  For this reason it is a form of faith-based economics.

Here in Florida, Governor Scott ran as a pro-business candidate (who isn’t?) who would lay out the welcome mat for business (who doesn’t) thus stimulating investment and creating jobs. As he said with his very first budget proposal:  “Cutting taxes is essential to economic prosperity…This ‘jobs budget’ is focused on the goal of shrinking government, reducing your taxes, creating private sector jobs”.  But, Governor Scott’s entire budget proposal was based on a false premise: that lowering taxes will create jobs. This is a sacred principle of supply-side economics but there is no evidence that shrinking government and reducing taxes will create more jobs.

There has been an enormous amount of empirical research examining the relationship between state tax levels and job growth. The general conclusion is that the effects are either non-existent or negligible; and most agree that there will be no positive effect of tax reduction if public spending is also cut. This is because public spending is an important source of job growth (public and private) and it can enhance the productivity of the state economy. 

There are several reasons for the weak effect of taxes on job growth. First, for most businesses taxes are a small part of the cost of doing business. When businesses are surveyed about decisions to expand or locate in a state, taxes are rarely a major factor.  Second, the more critical factors are the quality of the education system, the condition of the infrastructure, and the general quality of life. Starving the public sector will not address any of these factors and only make them worse.

Florida is already regarded as a “low tax state”.  The Tax Foundation ranked Florida 5th on the State Business Tax Climate Index for 2011. If there are only four states with a better tax climate than Florida, why is the state economy so anemic? There are obviously other explanations that have nothing to do with tax rates.

Governor Scott would also like to reduce the state corporate tax and eventually phase it out entirely. But it is already the 6th lowest among the 50 states.  Again, what does the state of Florida have to show for the current low corporate tax rate?  The lost revenue from Scott’s corporate tax proposal will only result in further cuts to essential social services (and public employment) in order to balance the budget.

None of this evidence seems to matter. When will Scott and others (both Republicans and Democrats) consult the best available evidence on how to energize the state economy rather than relying on supply-side ideology? This is the same ideology that led Scott to reject $2 billion in Federal grants to build high-speed rail between Orlando and Tampa, and the same ideology which led Scott to claim that the Federal stimulus did not create any private sector jobs in Florida, an assertion refuted by every reputable source.

Given the accumulated devastation to the economy and living standards that these policies have exacted, why are they repeatedly presented as the remedy for our economic ills (all the Republican candidates are proposing them in one form or another). The answer here may have less to do with ideology than the fact that supply-side economics provides an elegant rationalization for continuing policies that favor capital over labor, with the powerful defense mechanism, but false promise, of trickle down.

*With acknowledgement to Robert Kuttner and Yogi Berra.

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