Voodoo Economics Redux

Stephen P. Pizzo

You really didn't have to be a Rhodes Scholar or an economist to see it coming. All
you had to do is possess an accurate memory. When George W. Bush's economic
policies began to emerge early in his administration, I was pretty sure where we
headed, because we'd been there before. It's the great "trickle down/supply side"
lie. Ronald Reagan was the first to proffer this piece of fiscal fantasy, leaving his
successor, George H. Bush, with literally no choice but to break his "watch my lips,
no new taxes," promise - which in turn cost him reelection. Bush One raised
taxes, not because he wanted to, but because he had to. Reagan's policies had
rendered the US Treasury a smoking hole, along with the a once vibrant S&L
industry.

So, once it was clear that Bush Two had consumed the supply-side koolaid I
submitted the piece that follows to the San Francisco Chronicle. That was a long
time, and $4 trillion in additional federal debt ago.

Voodoo Economics, Son of Gingrich, Grandson of Reagan

(Originally published on Sunday, December 15, 2002 in the San Francisco

Chronicle)

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. In 2001, 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."