Larry Beinhart observes that looking at US data, top rate tax cuts lead to boom then bubble then crash, bank failures, and recession or depression.

Thom Hartmann interviews Larry Beinhart, 03 December 2008

[Thom]: Well, the conventional wisdom, as such, the frankly insane conventional wisdom, is that if you raise taxes you slow down an economy. All of us have memorized this because ever since Ronald Reagan came into office with that whack job Mr. Laffer at his side and David Stockman and Grover Norquist and the whole 'starve the beast' crowd and the 'destroy government' crowd and the 'hate democracy', small d democracy, crowd, they have been promoting this mantra that somehow if the rich among us,

if the rich among us have their taxes raised, then they will no longer be interested in paying your or my paychecks. And the old cliché, you know, 'I never saw a poor man give somebody a job', well first of all it's a lie. Most jobs are created in the United States by small businesses and most businesses are started by people in the middle class. But nonetheless, that's the conventional wisdom. How do we push back on that?

Larry Beinhart wrote "Wag the Dog", "The Librarian", the "Fog Facts: Searching for Truth in the Land of Spin", a new novel, Salvation Boulevard. His website is larrybeinhart.com... He's written some brilliant stuff, but to this topic, some of the most important, in my opinion, brilliant work that Larry Beinhart has ever done has been recently published on alternet.org. The myth of tax cuts stimulating the economy, et cetera. Larry, I'm so grateful you can come on our show. Welcome to the program.

[Larry]: My pleasure. Thanks for having me on, Thom. It's really a pleasure.

[Thom]: I have been flogging your work for weeks, now.

[Larry]: Well, thank you, thank you.

[Thom]: You have nailed it and I'm curious, first of all, you know, a lot of us go back to original sources. For example, I'm right now working on a work that's trying to synthesize Alexander Hamilton's industrial policy, Friedrich List's notion that free trade is the most stupid thing a country can engage in and, you know, in 1848, and today's policies.

[Larry]: I assume you're going to do interviews?

[Thom]: Actually, I mean, they wrote so eloquently about it and it reads quite well actually today, that I'm just weaving these things together. But, you know, where, what was your starting point on this, other than common sense? I have not seen any good, or maybe I'm just missing them, any good commentaries that have so succinctly and tightly pulled together the fact that when you raise taxes on the rich you stimulate the economy, as what you've written.

[Larry]: Well I was listening to all these guys during the campaign and everybody says, 'oh, we have to have tax cuts to stimulate the economy'.

[Thom]: Even Democrats are saying that.

[Larry]: Everybody was saying it. It was, it's a universal mantra, and we had just had it happen right before our eyes. George Bush cut taxes, the economy went into the tank. So he cut taxes some more. It certainly didn't recover in a healthy way and then it crashed. So I'm looking at this series of two tax cuts not doing what was claimed, so I decided to take a look at the economy and tax cuts. No, I didn't find it anywhere else, which bothered me. I mean, a lot of these things that I find, I kind of say, well, how come this is not the common wisdom instead of what. Anyway, so I took a lot and what I found, some really interesting patterns. I think the most interesting one, as we've basically three big crashes since we've instituted the income tax. Income tax was instituted by constitutional amendment in 1913. And we used it to finance the first world war.

[Thom]: Although it was used during Lincoln's time, by the way. That was a bit of an anomaly.

[Larry]: It was, yeah, but it was judged unconstitutional.

[Thom]: Yeah.

[Larry]: And so they passed the constitutional amendment so they could do it. So basically, if you're talking about income taxes you're talking about 1913 to the present. Okay. So, after the war, starting about in the twenties they started, the taxes were up around 77% or 70% for the richest people. We're only talking about top marginal rates here.

[Thom]: Right, this is people who are earning over?

[Larry]: I'm not talking about how much taxes you tax plumbers and teachers.

[Thom]: Right.

[Larry]: Top marginal tax rates around 70%. There's no war going on, they decide to cut taxes, you immediately have this pattern ensues. You get a boom. The boom turns into a bubble and then you get the crash of '29. And the crash is accompanied by massive bank failures and it's accompanied by, in those days, a depression, okay?

[Thom]: Right. So it looks like in the teens and twenties the high taxes on the rich acted as a stabilizer, as ballast for the ship of state, as it were.

[Larry]: Well let's, you know, it acts as a lot of things. And, you know, first let's deal with facts and then let's move on to theory. The facts are there were tax cuts, boom, bubble, crash, bank failures, depression. Then we get the next really big tax cut is under Reagan. And Reagan actually has a series of tax cuts. He takes taxes down from 70% first to fifty, and then he cuts them down to 38.5. Then in 1987 there's another crash and it was called at the time the worst since 1929. It was called Black Monday. A lot of the bubble that had been created after the tax cut was, surprise, in real estate. And there were bank failures; more bank failures than in the Great Depression. It was called the Savings and Loan crisis and there had to be a massive bailout, ok?

[Thom]: Right.

[Larry]: Then along comes George Bush the second. Taxes were already pretty low, top marginal rate was 39% under Clinton and he took it down 35%. And then he took, then he added additional tax cuts on capital gains which is unearned income and on inheritance taxes. And basically we have the same pattern; we had a big bubble, a lot of it was in real estate, and we had a crash. And the crash is accompanied by massive bank failures and, depending on what we do subsequently, it will be accompanied by either a recession or an actual depression.

[Thom]: Right.

[Larry]: Okay, and here's the really weird part. The four greatest periods of growth in modern US economic history: World War II was number one, of course, 1941 to '45. Top tax rate varied between 80 and 94%. Second period is post war under Truman / Eisenhower, top rate bounced around between 81 and 92%. Then we have the Clinton years. When Clinton came in there was a top marginal tax rate of 31%, he kicks it up to 37 and then 39 and we have healthy economic growth. The Roosevelt administration's, the New Deal's very controversial. There's a major industry, an entire major industry dedicated to proving the New Deal didn't work.

[Thom]: Right, no, all you have to do is Google "Great Depression" or something, you get the first thousand hits are right wing talking points.

[Larry]: Right. However, so we're talking about the period 1933 to 1940. Over that period all told the economy grew 58% even though there was a secondary recession in the middle of it, right? And then, and here's a really interesting point. Of course, you know, when you read the right wing stuff they do deal with actual statistics. It's just how they spin them. And here's the interesting concept. Okay, the right wing says the New Deal didn't work, that it was World War II that finally pulled the United States out of the Great Depression. In an economic sense what was World War II? World War II was the New Deal in quintuplicate.

[Thom]: Sure.

[Larry]: Okay, it was a ...

[Thom]: Massive public works program.

[Larry]: ... Massive public works, massive public employment. Of course it wasn't the kind of job you might like because you were likely to die because of it.

[Thom]: Well, and you could argue that ...

[Larry]: It was massive deficit spending and it was very high taxes.

[Thom]: Yeah. And you could argue that after the war was over, World War II actually slowed down our recovery because so much of our national wealth had been turned into bombs and dropped on Germany and Japan.

[Larry]: Yeah, well, actually, actually, the, World War II was hugely profitable to the United States. It was a great investment. We emerged from World War II as...

[Thom]: As the largest industrial power.

[Larry]: ... As the only industrial economy left standing.

[Thom]: Larry, can you stick around?

[Larry]: Yep.

[Thom]: We're going to take a break here. We're talking with Larry Beinhart ... The author of some just brilliant pieces recently over at alternet.org.

...

[Thom]: Larry Beinhart on the line. He's the author of numerous brilliant books; "Wag the Dog "The Librarian", "Fog Facts", his new novel, Salvation Boulevard... His newest article, it's a series of a couple of articles about Tax Cuts: The B.S. and the Facts over at alternet.org. A number of people over the last week or two that I have been pointing people to and quoting your articles, Larry, have been saying...

[Larry]: Thank you so much.

[Thom]: ... Have been saying, 'where can I find this stuff?' And so I just wanted to get you on and just lay it out. So let's just summarize this thing, in the few minutes that we have left here, that number one, tax increases on the rich, tax increases on the rich lead to sustained and prolonged and healthy growth in the economy. Tax cuts on the rich lead to bubble economies, crashes and crashes and, you could even argue, to wars because they very often come out of crashes. And, first all, is my summary competent so far?

[Larry]: It's competent. I can't say that it leads to wars, okay?

[Thom]: Yeah. No, I tossed that in. But, you know, World War II, well who knows? Anyway, it leads to bubbles and bursts, and...

[Larry]: That is definitely, each major tax cut has been followed by a bubble and crash, bank failures and either a recession or a depression.

[Thom]: Right, and going all the way back to 1913.

[Larry]: By the way, if anybody has managed to keep any cash at this last market crash, all the recoveries can be marked from the time the tax increase on the top tax rates have been instituted.

[Thom]: So the minute the Democrats raise taxes, start buying stocks.

[Larry]: That, yeah, if, you know, I'm not a stock analyst. I'm just telling you that historically if you look back, you'll see a tax increase and shortly thereafter, whether it's a few months or a year, that marks the point where the market starts going up.

[Thom]: Well similarly, you know, if you just look at the last hundred years of Republican versus Democratic administrations and the growth of the Dow, you see that under Democratic administrations it does well and under Republican administration it does poorly. Now we know why.

[Larry]: That's absolutely one of the reasons, yes.

[Thom]: Yeah. So, I'm curious, Larry, first of all, you're suggesting if we want to stimulate the economy, if we want to rebuild our economy, raise taxes on the rich, number one. Number two, do you have examples from other countries where you've seen these same kinds of cycles or you can demonstrate the same mechanism?

[Larry]: You know, I didn't look, I didn't look at other countries. I looked at the US situation. But clearly, some ideas are, you know, obvious enough that now kind of everybody's talking about them.

[Thom]: I think you have the foundation of a best selling book, here, Larry. I'm telling you.

[Larry]: OK.

[Thom]: I'm serious.

[Larry]: I think, clearly, clearly one of the ideas is you invest in infrastructure.

[Thom]: Yeah.

[Larry]: And one of the things about infrastructure that nobody talks about is that it is an invisible subsidy to all business.

[Thom]: Yes.

[Larry]: That is to say, it makes doing any other business cheaper if you can get things distributed, if you can communicate more easily and more safely and more quickly. Even things like, you know, rebuilding the inner city or working on a criminal justice system or finding alternatives to incarceration make doing business cheaper.

[Thom]: Yeah. Let me toss a couple of quickies at you here. Number one, if we want to save the country, roll back the Reagan tax cuts.

[Larry]: I expect, you know, the numbers here...

[Thom]: I mean, forget the Clinton tax cuts, roll back the Reagan tax cuts.

[Larry]: The numbers are actually pretty scary. I mean, when I start, you know, when I tell people, you know, when were the times of biggest growth, everybody accepts that it was World War II and Truman / Eisenhower. Okay, no problem. Then I point out that the top tax rate was in the 90% range. And that sounds strange and bizarre. And I mean, I find myself saying, 'oh my god, what if I end up making some money? I don't want to be taxed at 90%'. But I mean, okay, but even smaller numbers, when we went from 31% under Bush one to 37 and then thirty nine and a half percent under Clinton, that started a major improvement in the economy, okay?

[Thom]: Right.

[Larry]: It became a bubble. Again, thanks to information from the Heritage Institution, I think it was Heritage, it might have been American Express, who, you know, desperately didn't want Clinton to have credit for anything, pointed out that there was a tax cut after the tax raise, because there was a tax cut on capital gains that the Republican Congress pushed through.

[Thom]: Right, and you would submit that that actually created the bubble.

[Larry]: That marks the point, that explicitly marks the point where the boom, which is reasonably healthy, turns into a bubble, becomes the dot com bubble that becomes the crash.

[Thom]: Right, right.

[Larry]: OK, so taxes has to be targeted. Taxes on high incomes lead to saner kinds of investments.

[Thom]: Yep.

[Larry]: And does that tone mean that we've got to get off?

[Thom]: Yeah it is, we're out of time. It's the tyranny of the clock. But Larry, thanks so much.

[Larry]: A pleasure. I'll be happy to come back any time you like.

[Thom]: We'll do it again. Larry Beinhart, ... Larry, you're doing some brilliant writing here and I hope you turn this thing into a book, fast!

[Larry]: Okay.

[Thom]: Keep it up, keep it up.

[Larry]: Thanks a lot.

Transcribed by Sue Nethercott.