The historic election that took place last Tuesday gave many pundits an opportunity to wonder and postulate. The historic nature gave them a chance to discuss race and an opportunity to talk about the state of racism in America in a way we haven’t been able to do before. They had an opportunity to discuss the possibility of mandates. Is this a sign of a political realignment of the country? Is this a denouncement of the Reagan-Bush economic philosophies? I think it is, but I believe that the true test on the status and effectiveness of "Reaganomics" had been determined long before the 2008 election.
In 1989, after over eight years of deregulation of the banking industry, the United States found itself in a crisis that lead to us bailing out the savings and loan industry. This is after the stock market crash of October 19, 1987 (aka Black Monday). This was after over eight years of intentional deficit spending in an ineffectual attempt to devalue our own currency and cause foreign companies to bring foreign manufacturing jobs to the United States. Many people claim that as a result of these policies we also had a successful economy with tremendous growth. Since then we’ve had the 1990’s where we reregulated industry, raised taxes, and still had strong economic growth during the 1990’s. The difference is the Clinton Administration was able to avoid a recession.
The Reagan economic growth had very little to do with federal income tax policies. Why was there rampant economic growth in the Reagan era? The same reason there was rampant economic growth in the 1990’s as well as the 1920’s: New forms of technology. Economic strength and growth is fundamentally the result of the peoples’ ability and willingness to buy. The 1920’s saw the popularization of radio, the first working mechanical television, and movements ahead in movie technology which included the first movie with a soundtrack (Don Juan, 1926) and the first all-color, all-talking movie (On With the Show, 1929). This economic growth followed the invention of the assembly line, creating numerous jobs, which resulted not only in mass production, but mass consumption as well. Likewise the 1980’s had an economy fueled by the popularization of video games, VCRs, cassettes, Walkmans, and the personal computer were what fueled the Reagan economy. Likewise the strong Clinton economy was made through stuff like the Internet, CDs, DVDs, and small and affordable satellite dishes.
With this many people claim that the lower taxes encouraged new business growth from entrepreneurs. This point is foolish because it says that someone with a business idea that’s a "sure thing," would sit around saying "Let’s see here, I can start a business and make $300,000 of profit in the first year. I can either keep 60% of 300 grand, or 100% of nothing. Meanwhile if I sit back I run the risk of someone else with the same idea coming and potentially stealing some of my market share." This argument assumes that someone would actually say no, they prefer to wait and ultimately loose out on money, which can be invested and further money made on your income. This part of the low-tax philosophy assumes that someone will actually be foolish enough to say they prefer to pass on those economic opportunities because they prefer to wait until they can keep a few extra percent of their ultimate income. If someone’s dumb enough to make this choice, they’ll probably drive any business they may run into the ground anyways.
Lowering taxes on the upper class will also not result in massive new job creation. The majority of small businesses are sole proprietorships and partnerships, don’t make enough money to be taxed at those levels, and don’t need to worry about it. What small businesses need to worry about is making sure there are roads and bridges so customers and suppliers can make it to their store, a public transit system that allows their employees a chance to get to work, and good police and fire station to secure their business. After all, small businesses are vulnerable and one big failure of infrastructure in a single town can put a small business out of business. What pays for cops, fire fighters, roads, and bridges? That would be tax money! Large corporations don’t have to worry about that nearly as much, and if it’s bad enough they can afford to build their own roads and maybe even some smaller bridges. They have a couple hundred outlets and stores, if one does bad for a while, it doesn’t mean all that much. A good entrepreneur will hire enough employees to keep business going effectively. Most small businesses won’t make enough money to have to worry about this.
The "trickle-down" theory is also complete hogwash. The thought that it is a good idea to give tax breaks to higher-income individuals because they might spend it is a valid point. But giving a tax break to lower and middle class (while possibly raising minimum wage) is a better idea. The lower class will spend that money and the middle class are far more likely to do so than the upper class, who may just dump their extra money in the stock market. This is good for Wall Street and the Dow; it is also meaningless for me, for you, and for small business.