KENNEDY: Faith-based economics fatally flawed

November 4, 2017

Sheila Suess KennedyIf Social Security is the “third rail” of America’s political system, tax policy is that system’s ideological—one might also say religious—fundamentalism. In no policy arena is belief stronger and experience less relevant.

As Congress prepares to “reform” the tax system, we once again see the fervor with which lawmakers conflate tax cuts with tax reform.

I have often referred to the belief that cutting taxes on the wealthy will create jobs and prosperity—a central premise of GOP tax policy—as an “article of faith,” because when you take something on faith, you do so because you have no empirical evidence for its validity. In this case, quite the contrary; we have substantial evidence that the premise is fatally flawed.

When President Clinton hiked taxes, the economy boomed. When President George W. Bush slashed them, the economy ultimately collapsed. In fact, it wasn’t until after most of Bush’s tax cuts expired, during the Obama administration, that the post-Great Recession recovery finally picked up steam.

And then, of course, there are lessons we should have learned from Kansas and California.

Kansas dramatically “underperformed” the rest of the country in economic growth and job creation after Sam Brownback, its “true believer” governor, slashed taxes on individuals and corporations. California, which horrified those same true believers by imposing the nation’s top income tax rate, subsequently thrived. By 2015, California had the fastest-growing economy in the nation. Kansas? Dead last.

Nick Hanauer is a billionaire who has been arguing that Republicans have the economic argument exactly backward; he insists it is inequality, not taxes, that retards economic growth.

“Republicans’ problem is that they have economic cause and effect reversed: Low wages and rising inequality are not symptoms of slow growth, low wages and rising inequality are the disease that causes slow growth—and inequality cannot be cured by creating even more inequality. In reality, our modern technological economy is best understood as an evolutionary feedback loop between innovation and demand. Innovation is the process through which we evolve new solutions to human problems, while consumer demand is the mechanism through which the market selects and propagates successful innovations. And it is economic inclusion—the full participation of as many people as possible in as many ways as possible, as innovators, entrepreneurs, workers and robust consumers—that drives both innovation and demand. The more we invest in the American people—in our wages, our education, our health care and our infrastructure—the more dynamic that feedback loop, and thus the faster and more prosperous our economy grows.”

As I tell my students, if you own a widget factory, and no one is buying your widgets, you are unlikely to hire more widget-makers. When consumers lack disposable income with which to buy your product, you cut back—or stop production entirely.

Economists tell us consumer spending accounts for 70 percent of GDP. When low-wage workers are struggling just to survive, when they are scrambling to cover the bare necessities, they lack the wherewithal to purchase non-essential goods and services and the economy stalls. (If too many fall into this category, the economy tanks.)

If lawmakers were really interested in the health of the American economy, rather than tax cuts for their rich patrons, they would focus on our growing inequality and policies that increase the ability of low-wage workers to spend extra dollars in the marketplace.

Paul Ryan and his faith-based partisans to the contrary, wealthy people and multinational corporations aren’t the “job creators.” Consumers are.•


Kennedy is a professor of law and public policy at the School of Public and Environmental Affairs at IUPUI. She can be reached at skennedy@ibj.com.


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