Will Reaganomics Work in the 21st Century?

The Grand Old Party has taken one of the greatest political risks of this generation with the tax bill that became law on December 21, 2018. Congressional Republicans are betting that Reaganomics will work in the 21st Century.

The GOP is betting that a combination of tax cuts and increased tax credits will pump enough money into the economy to fuel a major boom. The idea is grounded in the Keynesian notion that government intervention is needed to drive economic growth.

Reaganomics sort of worked when Republicans tried it in the 1980s. The Reagan-era tax cuts did fuel an economic boom, but it took several years to be widely felt. Strangely enough, the biggest beneficiary of Ronald Reagan’s tax cuts was William Jefferson Clinton.

Why the Tax Cut is a Political Risk for Republicans

The full effect of Reaganomics was felt in the mid-1990s when Slick Willy was in the White House. The big economic boom of the 1990s was partially fueled by Reaganomics.

If history is anything to go by the effects of this tax cut will not be felt until 2022 or 2024. Given present political realities, there is a probability that a Democrat will be in the White House then, and take credit for the effects of the tax cut.

Congressional Republicans should be commended for passing this tax cut and forcing President Donald J. Trump (R-New York) to sign it. For they have passed a law that may not benefit the Grand Old Party that is probably good for America.

Congressional Republicans have taken a huge risk here, perhaps greater than the one that Democrats took with Obamacare. If the promised good times do not appear or get shared by all they will be crucified for it. Remember, Democrats lost control of Congress after Obamacare and still have not regained it.

Will Reaganomics 2.0 Work?

The new Reaganomics will probably fail to help most people because America is a very different country than it was in the 1980s.

The United States is an older country with greater income inequality and a lower job base than it had then. The number of factory jobs in the United States has fallen by 30% since 1997; largely because of automation, and around 15% of working-age white males are not working. Back in 1980, only around 7% of working-age white males were outside of the labor force.

Simply put the mechanisms that made Reaganomics work, a large and growing labor force, and a strong middle class are not there. The proceeds of the tax cut such as a $2,000 a year child credit and a $1,400 rebate will not make up for the income average Americans have lost elsewhere.

There has been no growth in earned income for around 60% of the American population since 1980, hedge fund manager Ray Dalio estimated. The wealth gap is far greater than it was in the 1980s; Dalio thinks the present wealth gap is equal to what it was during the Great Depression.

Another crisis the Republican tax bill does not address is savings. Dalio estimated that only one-third of the bottom 60% of the population saves any of its income. The tax bill provides absolutely no incentives for savings by the working or middle classes.

Can Reaganomics 2.0 Create Jobs?

Another part of the Republican gamble with Reaganomics 2.0 is that it will create jobs. The thinking is that lowering the corporate income rate to 21% will get big companies to bring money held overseas home.

The hope is that the companies will invest the money in America and use it to create jobs here. There is no guarantee that will happen; companies are just as likely to spend the money on acquisition, stock buybacks, increased advertising, or automation. The tax cut can backfire and lower the number of jobs; because some companies will invest the tax-savings or income brought home on job-killing technology like robots.

A related problem is that some of the companies with the most money overseas like Apple, Microsoft and Alphabet (Google) do not employ that many people in the U.S. Alphabet and Microsoft are basically software companies and Apple is a design shop for products that are built elsewhere. A large infusion of cash is not likely to increase their labor forces.

 

A greater dilemma is that many companies do generate that much income. Amazon (NASDAQ: AMZN) reported an operating income of $347 million and a net income of $256 million despite recording $43.744 billion in revenues on 30 September 2017. That means the Everything Store will pay pennies on the dollar for all the revenue it generates.

A value-added (VAT or sales) or border adjustment tax, or a straight income tax on Jeff Bezos’ $98 billion fortune would generate more revenue from Amazon for the government. The tax bill will have little effect on low-income companies like Amazon.

Will an Aging Population Doom Reaganomics 2.0?

The greatest threat to the new Reaganomics is the aging of America. Around 15% of the US population or around 46 million people are over 65 today. Those figures are supposed to increase to 24% and 98 million by 2060 according to the Population Research Bureau.

This creates a major challenge because it will reduce the number of people working and earning income while increasing demands on Social Security, Medicare, and Medicaid. Most of the aging Americans will depend on Social Security for income only one-third of the bottom 60% of Americans have retirement savings. Even fewer of them have pensions.

The situation is made far worse by the Social Security or FICA tax which is only collected on the first $127,200 in yearly income. That means millionaires and billionaires are only paying $8,268 a year towards Social Security. It puts the burden of financing Social Security on wage earners at a time when the number of wage earners in the country is falling.

This means the government will have to do one of three things to finance Social Security. Expand the FICA to cover all individual income (which would be popular but politically difficult), raise other taxes (unpopular and politically divisive), or borrow the money (easiest because voters do not see it). The alternative is to cut Social Security which is political suicide because Senior citizens vote.

The Aging Crisis will Throttle Reaganomics 2.0

A related problem here is that tens of millions of Americans; including an estimated 74.9 million baby boomers will nothing to live on but Social Security. Since the average Social Security payment is around $1,368 a month, it means a massive drop in spending power for those people, and a huge drop in economic activity for America.

It also means less tax money coming in even as the demand for government services will increase. For example, the demand for nursing home services is expected to increase by 75% by 2030, according to the Population Research Bureau. Since most nursing home payments are covered by Medicaid things are about to get far worse.

New Thinking is Needed in the Grand Old Party

The Republicans are going to have to change their game plan for economic stimulus. A smart move would be to increase the average Social Security payment to $2,000 a month and collect the FICA tax on all individual incomes.

That would shore up Social Security, reduce the strain on the national debt and pump tens of billions of dollars of additional income onto America’s main streets. It would also buy the enduring loyalty of tens of millions of older voters. If Republicans do not realize this, Democrats will  seize the opportunity.

A related move would be to add nursing-home care to Medicare and raise Medicare taxes now to pay for future expenses. Another needed strategy is to take some efforts to bring Medicare costs; under control such as giving the Centers for Medicare and Medicaid the power to set prescription drug prices and import cheaper foreign-made drugs.

The Republicans have taken a massive gamble on Reaganomics 2.0. Even if it works, their chances of retaining a Congressional majority and keeping the White House are slim. New thinking is needed in the Grand Old Party.