3. REAGANOMICS--ESCAPEES' HEAVEN
Ronald Reagan implemented an entire economic program centered on tax cuts which we now call "Reaganomics." Central to Reaganomics was the alteration of the tax laws within the framework of "supply-side" economics. According to the Laffer Curve hypothesis, if you cut taxes, you will in theory increase savings, investment, and production. In actuality, however, Reaganomics cuts taxes for those who were already escaping their fair share and using the money for luxuries, speculation, and acquisition. Reaganomics and supply-side economics are facades used by the politically well-fixed to hide their tax evasion. Reaganomics is tax cuts for a fewer few. In effect, Reaganomics rejects the supply-side hypothesis; consider the various "revenue enhancers" sought by Reagan to reduce the deficit.
The very act of seeking new tax revenues from the middle-class reveals Reaganomics for what it was from the start: free rides for the well-fixed at the expense of the middle class. To quote David Stockman in one of his honest moments, "Supply-side economics is a Trojan Horse." Under the auspices of supply-side economics, the productive individuals and industries have been taken to the cleaners. Reagan's tax cuts were heavenly bliss for tax evaders, an ignorant bliss to be followed by a painful, hellish world.
Did Reaganomics increase savings, investment, and production? What good are tax cuts without a reduction in the problems that originally prompted taxes? The tax cuts of Reaganomics fall into a class different from tax cuts based on the resolution of the problems. Reagan's tax cuts, as many people are learning, were nothing more than reducing the taxes of a few while increasing the taxes of the many. Rather than being a general tax cut, Reaganomics was and is a collection of tax shifts.
In reading the following accounts of Reaganomics, there are two questions to keep in mind. Did the tax cuts increase production and productivity per capita? Or, did they merely shift the tax burden?
The key architects of Reaganomics were Donald T. Regan and Ronald Reagan. Within their personal histories is the "something for nothing" philosophy that best characterizes Reaganomics. However, in a zero-sum world, someone has to pay. Reagan's tax gifts for a few represented a increased burden for the many. Reagan's plan overlooked one simple fact: taxes are raised because of problems. Merely cutting taxes does not solve problems; it increases them.
Part of the Economic Recovery Tax Act (the centerpiece of Reaganomics) was a liberalization of tax credits for leasing. Previously, these tax credits were tied to the sale of new equipment; now tax credits can be used for the sale of old equipment, plants, and assets. For instance, Ford Motor Co. had $340 million of unused tax credits, and under the new law it could sell these credits to a money-rich company (like Exxon) through a lease arrangement. Ford would sell Exxon enough physical assets so that Exxon would now have the tax credits. Ford would retain use of the assets through a lease agreement. Exxon would receive upwards of five dollars in tax write-offs for every dollar it gave Ford through a lease arrangement. The proclaimed benefit of these liberalized leaseback tax credits was that they helped the money-poor companies. Hogwash.
As stated earlier, Ford, International Harvester, and other basic industries cut their own throats by selling their tax credits. One result is an inevitable increase in federal borrowing because of reduced tax revenues. This increased borrowing for the National Debt has driven up interest rates and decreased the sales of autos, tractors, and other basic goods. The money-poor companies are not helped by liberalized leaseback arrangements.
The liberalized tax credits for leasebacks would never have gone into effect if the two crucial questions had been asked: Will the tax changes increase production per capita? Or, will the tax changes merely shift the tax load? Under the new leaseback laws, there has been no increase in production, since old assets were legalized as the basis for tax credits. Overall, fewer taxes are collected from the money-rich companies and the tax deficits are either made up by the overtaxed citizen or contribute further to an inflationary, job-destroying National Debt.
Big, non-manufacturing, service corporations are not alone in escaping their pragmatic share of funding economic stability. Thanks to the "capitalists" on Wall Street, many smaller service businesses escape their tax share. As noted in the Wall Street Journal in late 1981, "tax benefit sales under leasing provisions of the new tax law can apply even to smaller companies, brokers and bankers are discovering." Brokerage firms on Wall Street, led by Merrill Lynch, put together pooled packages for smaller tax avoiders.
The aim is to form packages of about $100 million in benefits and thus lure cash-rich concerns into lease pacts. "My plumber and dentist are going to be able to invest in these things," quipped a Wall Street lease expert.
The services of dentists, plumbers, and doctors were expensive enough for the average citizen without a law that required the citizen to pick up the tax share of these service people as well.
The previous quotation is just one example of how the economy has not been geared to help the people engaged in the actual production of wealth. Rather, it was geared to eliminate the tax burden on those industries and individuals who provide services, e.g., dentists, plumbers, and oil companies. The service industries are booming while the manufacturing concerns are falling silent. This scenario is common to Reaganomics.
It is easy to get rich, to boom when one does not have to pay his share of taxes. It is also easy to understand why manufacturing individuals and industries began collapsing--they have to carry the tax load of the service industries. When tax credits are given to the service corporations at the expense of the manufacturing corporations, no anti-inflationary expansion of productivity should be expected. Such tax credits are merely shifts of the tax burden and are counterproductive.
Would America be better off if leaseback tax credits had never been legitimized? Would the Treasury Department have more revenues if leasebacks had never been authorized? Would the Treasury Department be ahead if it authorized grants to basic industries after collecting taxes from the service industries? Would basic industries be ahead if they had not engaged in any leaseback arrangements? Mathematically, the answer to all of these questions is a resounding "Yes!"
Overall, the Treasury would have more revenues if it had written off the tax credits that have been sold by the basic industries; the Treasury should have taxed the money-rich companies and split the taxes with the money-poor companies. As it is, the Treasury has less tax revenue.
An amusing parallel exists for the leaseback rationale which shows the absurdity of it. Should the government let poor people with children sell their unused tax credits? Suppose, for instance, that I have 10 family members, my yearly income is only $3000 and my total tax exemption is $10,000. Using the leaseback rationale, I should be able to sell the tax credits to someone who doesn't have any kids, but has a lot of money. What a wonderful way of taking care of the welfare problem! And, one old adage would finally be true: "The poor have their children to comfort them."
The welfare example supports the position that leaseback tax credits are fraudulent. In 1980, welfare and foodstamps cost the taxpayer approximately $37 billion dollars. Would America be ahead if politicians allowed the politically well-fixed to take over the welfare program through a tax credit scheme similar to the leaseback arrangements for ailing industries? No. Assuming that every leaseback dollar costs the Treasury Department between two and five dollars, the cost of welfare would explode to between $74 billion and $185 billion.
If welfare were put on a leaseback basis--so that the poor could sell their unused tax credits--welfare would cost the taxpayer more. Similarly, Reagan's plan of helping ailing industries through tax credits for leaseback cost America more than if the government had directly taxed the well-fixed service industries and given some of the money to the ailing manufacturing companies.
If all the unused tax credits were bought up on the industrial and individual level there probably would be no income tax revenues; the National Debt would explode. Leaseback tax credits are another example of how the interests of the taxpaying citizen are not re-presented in Congress. Through Wall Street financiers, a few middle-class people have been able to participate in leasebacks. However, they have also be participated in the destabilization of the American economy.
Business Tax Cuts
In the previous section, the distinction between manufacturing and non-manufacturing corporations was restated to demonstrate that Reaganomics does not increase the production of new wealth. The architects of Reaganomics should have known this. The following quotations detail how basic industry is not helped by the business tax credits of Reaganomics.
The truth is that in today's inflationary climate, accelerated depreciation [for tax credits] won't have a very significant impact on basic industry," says Lee G. Weeks, vice president for corporate finance at Armco Inc.
The second quotation points to what needs to be cut by legislation: the interest rates. As long as unlimited savings interest rates are legal, the loan interest rate will also be unlimited. All will suffer. Only the bankers make more money when loan interest rates are compounded at high rates.
Since production is not helped by business tax credits, why did Reagan push for them? His attention was bought by the tax-exempted people of America (e.g, bankers). Overtaxed individuals and industries will never have a voice unless they organize.
Taxless Stock Option Pyramids
Another skewering prong of Reaganomics is alterations in stock options. These changes were rationalized as "incentives." Sound familiar? Supposedly, if executives were given better stock options, they would work harder and produce more. This is a bad supposition because many executives tend to industrial business less and less as their stock options increase--they become stock watchers instead of productive corporate managers. Stated another way, people leave their old jobs when a better paying job opens up. It is foolish for the government to legalize stock plans that cause executives to forsake their regular jobs in lieu of potential stock option gains.
The following quotation describes the nature of the new stock options. A fortune could be made easily by merely pyramiding stock options.
The new tax act not only lets you pay for option stock with company shares, it defers taxes on the shares traded in. That's a license to parlay a single share into a stock pyramid; shares bought at the option discount can be paid right back at market value for more option stock.
In addition, is it fair to the average stock holder to have his ownership of the company diluted while other stockholders are allowed to pyramid their holdings without increasing the assets of the company? Reaganomics is clearly capitalism* for a fewer few (decapitalism)*. But, who picks up the taxes that are not paid?
In late summer, 1981, the estimated lost revenues were $9.6 billion by 1986. About two months later, the estimates had tripled to $29 billion. The figure continues to rise as Wall Street brokers and bankers come up with new leasing arrangements for ever smaller businesses. The final tally will be astronomical, so will the National Debt. However, The blame for this imbalanced tax system does not rest with the small fish who are forced to participate for their short-term survival. The blame rests with the top policy-makers who imbalanced the economy with "something for nothing" tax laws.
All Savers: All Losers?
Another of the devilish prongs of Reaganomics is the interest-free All Savers certificate. Similar are the Individual Retirement Accounts, the IRAs. Supposedly, these necronomic creations help people fight the pains of inflation. However, if one applies the same two crucial questions about increased production and tax shifts, the flaws become apparent.
Taxes are collected to solve problems. If the problems are not solved, it is pointless and perhaps harmful to cut taxes. This applies especially to one political panacea of 1981: the tax-exempt "All Savers Certificate." The people who buy these do not end up with a more problem-free existence, nor do they pay less in taxes overall. The additional, tax-free dollars are be lost to the inflationary effects of a rising federal deficit. One should not trade a minor reduction of taxes on one's savings for greater financial losses due to increased taxes elsewhere or increased inflationary losses.
Because the number of tax-prompting problems does not decrease as a result of tax-free interest on All Savers, the government simply has to increase taxes elsewhere or allow the National Debt to balloon further. Neither of these results help people who buy All Savers. This is especially true of the aged who have the existing assets (e.g., homes) that the government will have to tax. Reaganomics reduced not only income taxes, but also the number of employed who are paying them. These tax losses have to be made up somewhere, and since there is less new wealth to tax because of unemployment, taxes on existing wealth or assets have to increase. Ironically, assets are owned by older workers who are also the main purchasers of All Savers.
The high rate of return on All Savers should also not be construed as a way to beat inflation. The financial institutions merely re-lend the savings, with their usual service charge. Many business cannot afford these new rates; this is especially true of the basic essential industries on which the aged depend. The bankruptcy of these businesses also shows up as higher product prices due to shortage inflation.
All Savers are not a tool by which to beat inflation; they are tools of financial self-destruction. They are also another indication of political corruption and incompetence.
The federal government [politicians], primarily at the urging of large banks and over the objections of many small banks and thrift institutions, has begun deregulating the interest rates that financial institutions can pay on deposits [savings].
As discussed later, bank income soared with All Savers even though the economy sank as a whole. Why? Because bankers make more money when loan interest rates are high. Consider the effects of a 4% spread between the savings rate and the loan rate. At one extreme, if the interest on savings were 0%, then the interest on would be 4%--simple enough. However, because of the manner in which banks maximize the spread by compounding both savings and interest rates, it is more accurate to calculate the difference between the squares of the two rates. This comparison yields a figure of 16 (4x4=16, 0x0=0; 16-0=16). At the other extreme, consider the difference between a 20% savings rate and a 27% loan rate. The squared difference is 176.
Obviously, it is not in the self-interest of the banking community to bring interest rates down. The record levels of bank income during periods of high interest rates and recession indicate that banks do not have a personal stake in financial stability. Their short-term greed has affected law-making (e.g., interest-free, All Savers). Such laws strangle the economy with unbridled interest rates.
Why did the politicians listen to the bankers? Campaign contributions and speech honorariums. Recall from the chapters on election reform how the speeches of some politicians are prepared by the audiences paying the honorariums. Incompetently, the politicians keep thinking that they can get something for nothing by altering the return on paper assets. They refuse to tie the value of one's income to the productive value of one's time. As long as they keep allowing wealth to be acquired in the form of "old" assets, people will spend their time shuffling their old wealth around instead of using it to create new wealth.
Flawed Reasoning--More Savings
One rationale for the tax-exempt All Savers was that it would increase savings to the benefit of production and construction. In 1981 for example, the Savings and Loan Foundation, Inc. of Washington, D.C., ran this ad purporting a connection between savings and economic well-being:
Isn't it time to give a real tax break to savers? For some time, we've been pointing out that Americans save an average of only 5.5% of their income--while Britons save an average of 13%, West Germans 15% and Japanese a healthy 26%.
To imply that savings alone is enough to help an economy is false advertisement. The lack of a connection between quantity of savings and economic well-being is more evident if one looks at the erratic Italian economy. (Italians save an average of 23%) Another implication of the advertisement is that these foreign governments encouraged savings via tax exemptions, which was not the case.
One should be wary of the officials at Savings and Loans. This was not the first bit of questionable PR to be grounded in corruption and incompetence. Another example was their cry that they are saddled with low-interest loans in times of high-interest savings. They did not pay for those old loans with the high-costing money of today; those old loans were made with money from savings with low interest rates. That the Savings and Loan officials let the savings rates escalate (and let the profits be eaten up by their inflated salaries and expense accounts) is something for which they, and not the savers, ought to have paid.
The issue is not the amount of savings, but what is done with the savings. It is the quality of savings (quality of use) not the quantity of savings that counts. As shown later in this section and in the chapter on Savers Mutual Funds, the Savings and Loan officials have had poor quality control when it comes to using the savings of America. The issue of tax-exempt savings was promoted by the officials of Savings and Loans to maintain their salaries for as long as possible. In other words, the thrifts and the savers have been milked. Assess the following 1981 excerpts and see if you agree with these conclusions.
"Hope for 'All Savers' Housing Boom Fades Because of Loopholes in Law"
On the basis of these excerpts, were the officials of the Savings and Loan industry trying to organize "thriving" communities through "thrift" institutions? Were the officials responsive to the needs of the community that supplied the funds? A justified conclusion is that thrifts were merely putty to be manipulated to maintain excessive executive salaries as long as possible before bankruptcy.
Thrifts have been using the acquired funds mostly for short-term speculation. Will short-term speculation stimulate needed production? A nutshell analysis of America's future and the growth of short-term notes is captured in the words of one letter to an editor:
Where is it demonstrated that volatile savings today are going into plant and equipment? Or are we to believe that America will indeed re-tool and rebuild on 30-day credit (i.e., the stuff of which money market funds are made)?
No nation was built on laws that encourage high interest rates and short-term speculation. America needs long-term investment which will come only from a mandatory, across-the-board reduction in savings interest rates. To think that bankers and financiers will lower interest rates when they make more money on high interest rates is foolish.
Consider also this thrift chairman's concern about tax-exempt All Savers:
In Cleveland ... [a] chairman says he worries that much money put into the certificates will come from passbook saving's account, thus increasing the thrift's cost of funds.
Would you keep your money in a low interest passbook account if your thrift started offering a savings account that paid almost three times as much? High interest rates on savings do not increase total savings. High interest rates on savings initiate the following sequence which reduces total savings:
1. high loan interest rates
A person cannot increase his savings if he becomes unemployed and must draw on his savings.During the 1980s, as unemployment rose due to the high loan interest rates necessitated by unlimited, usury savings rates, total savings or capital formation decreased. There were fewer people able to take advantage of incentives to save. Simply stated, increasing the interest rate on savings decreases the rate of savings.
Reagan's increased savings were like his tax cuts: they didn't actually exist. What happened, in both cases, were shifts. Similarly, neither aspect of Reaganomics solved any problems. The problems not only remained, but also have since grown along with their inflationary cost.
Tax Cuts or Shifts?
Did Reaganomics symbolically cut only the most obvious form of taxation (income) while substantially increasing the overall rate of taxation for Americans? As found in the recorded actions of the Reagan administration after the onset of Reaganomics, the answer is yes.
Local Tax Increases: Stated and Subtle
Reagan did not cut taxes, especially local and state taxes. Through policy statement and action, he affected an increase of nonfederal taxes. An example of a policy statement on Reaganomics is the following statement made in 1981 by a founding father of supply-side economics.
States should generate their own revenue and not continue to seek aid from the U.S., an undersecretary of the Treasury said. Norman Ture suggested states raise taxes if necessary, even if it undermines Reagan's economic recovery plan.
Reagan's "New Federalism"--putting federal programs in the laps of cash-strapped states--required increased local and state taxes.
Ture's statement and the "New Federalism" show how Reaganomics merely shifted taxes, and illustrate the consistent contradictions of supply-side economics. This was just another example of voodoo economics--a mixture of contradictions, counterproductive actions and the hope that the economy wouldn't notice. The economy, however, didn't miss a thing.
Yet another example of Reagan shifting (not cutting) taxes is his elimination of certain kinds of income (e.g., tax-free municipal bonds) for localities. He essentially forced the localities to raise taxes to offset the loss in revenues. How could localities determine their destinies (as Reagan preached) when the federal government was eliminating some of the substance by which municipalities control their environment? Simultaneously, Reagan withdrew support for the localities and undermined their ability to care for themselves.
Under these circumstances, states and localities must increase revenues. As Reaganomics eliminated federal dollars, it also increased the problems that consume local tax dollars. One of the more subtle shifts was the elimination of certain federal employees from the federal tax rolls. While federal taxes were no longer compensating these workers, state taxes allocated for unemployment were. Again, Reagan did not cut taxes, he shifted them. By putting federal workers on unemployment, he changed their source of tax-supported income from federal to state.
Tax Cuts Are Not Problem Cuts
Before continuing this dissection of Reaganomics, a review of the relationship between taxes and problems is appropriate. Reagan was elected on the platform of cutting taxes as a way to improve the quality of life. The flaw in his rationale becomes clear, however, once one recognizes that taxes are raised in response to public problems that private individuals are unable or unwilling to solve. Taxes are not arbitrary levies; they are the symbols of the nation's unsolved problems. They are one facet of inflation, the cost of unsolved problems.
Eliminating the symbols or symptoms of a problem does not eliminate the problem. Removing the thermometer that indicates fever does not make the patient well. By themselves, tax cuts do not improve the quality of a problem-ridden life. Rather, the cost of the problems is shifted resulting in increased inflation and violence.
The supply-side tax cuts, championed by Reagan, Regan, Kemp, Roth, and Stockman were but another instance of the tax system being used to benefit a fewer few. The whole country continues to suffer as a result of rich special interests controlling Congress. Supply-side tax cuts further shifted the cost of funding America's stability away from the tax avoiders. Unfortunately, the traditional tax carriers can no longer bear the weight; they and the infrastructure of the economy are being crushed. Reagan's tax cuts were irresponsible because they did not solve the problems underlying the taxes.
Onset of Reaganomics: October 1981
When did Reaganomics begin? During a televised speech in September, 1981, Ronald Reagan dismissed claims that his tax programs were not working. They did not legally go into effect until October 1, he said. In a typical political posture, he blamed his predecessor for the worsening mess even though he had been in office for nine months and Congress had passed his program some time before (April).
Reaganomics went into effect on two different days. The official day was October 1 but the more important date was the day of passage. An analogy will suffice to explain the difference between the legal and logical day of a bill's enactment. The analogy will show which is more important and show why Reaganomics was responsible for the worsening economic mess before October 1.
Suppose you were on a crippled, sinking ship. Suppose the captain said he was going to blow a hole in the bottom in order to let the water out. Would you wait until the appointed time to see if the program work? Or, would you abandon ship as soon as you logically could?
Reagan was the captain of our ship. He passed a program that said, in effect, "The way to buoy up the collection of taxes is to blow away the collection of some taxes." Enough people looked at his figures and drew the simple, unavoidable conclusion: Reaganomics was not going create a production boom, but was merely going to shift taxes and sink the economy under the weight of an exploding National Debt.
Reaganomics went into effect the day it was passed. People logically reacted to it and began to abandon ship. Reagan's insistence that his programs played not part in the worsening economy--because the legal date of enactment had not arrived--merely provides evidence of his inability to grasp the substance of the human environment.
In a similar vein, Reagan kept saying his program would begin to work once the economy began to rebound. It was a classic Catch-22. The counterproductive nature of Reaganomics continued to destroy the necessary conditions for Reaganomics to work. Each day that Reaganomics is in effect, the economy sank further from the take-off point dreamed about in Reagan's speeches.
Modern Leadership: Inflationary Cost
When Reagan rammed his program through Congress, the press described him as a great leader, a leader who proclaimed that it was time for a change.
There was no change; there was no leadership. Reagan's bills passed through Congress because he politically compromised the nation. He bought the votes of the legisflators with inflationary promises. The following is but one ounce of the inflationary tons with which Reagan burdened America.
Over the summer, they [Reagan's aides] traded votes and favors. They dropped their opposition to sugar and peanut subsidies and backed off on their goal of ending grain and cotton target prices.
Reagan did cut taxes, and he increased the inflationary tax supports in order to buy votes for the programs that he was supposedly "leading" through Congress. But, to be a true leader, one gains followers by educating people to a better way. One is not a leader if he wins immediate followers by selling out his distant followers. By agreeing to inflationary price supports for a special few in order to get votes for his programs, Reagan saddled average Americans (his distant followers) with more inflation.
Ronald Reagan is a prime example of the inflationary cost of "modern" political leadership. Reagan did not lead by persuasively educating the Congressional politicians to a better way; rather, he horsetraded in order to get votes for his way, which was far less than the American way. Like many other politicians, he compromised America for his own short-term interests. Political compromises are killing America.
Unstopped, Reagan's legacy will not be one of fewer taxes and a booming economy. Already, Reaganomics has given us the joys of deregulated gas, a gold standard, and more tax shifts. The productive way to stop Reaganomics and all the other abuses by politicians is to create the antidote: democracy per diem and capitalism per capita.
NUSA Proposition #2: Reaganomics should never have been passed into law.
Reaganomics: Legal Fraud
For a number of reasons, Reaganomics probably should be called Reganomics after the Secretary of Treasury, Donald T. Regan. Foremost among the reasons are those who benefited from Reagan's programs. The beneficiaries are the same people who frequent Regan's former place of employment, Merrill Lynch. It would be hard to deny that the Economic Recovery Act was nothing more than an extension and legitimization of the policies fostered by Regan at Merrill Lynch.
Another, simpler reason for using the term "Reganomics" is that Regan was the cabinet member with whom Ronald Reagan spent the most time. This chapter lists actions and comments by Donald Regan as chairman of Merrill Lynch and as Secretary of Treasury. Taken together, they reveal the hand that molded Reaganomics.
Chairman of Merrill Lynch
Donald Regan was Secretary of the Treasury, the cabinet that is responsible for collecting and handling tax revenues. One can get an idea of the tax programs that Regan would sponsor, or at least not oppose, by looking at his professional and personal background. As chairman of Merrill Lynch, was Regan a true, pure capitalist who increased production per capita, or was he merely a decapitalist talking like a good capitalist?
Regan's professional philosophy and activities are detailed in a 1980 article entitled "Merrill Lynch Expands From Stocks To Gamut Of Financial Services --- Chairman Regan Leads Years Of Growth in Real Estate, Insurance and Banking." Merrill Lynch popularized new tax shelters, tax straddles, left-handed financing, inside trades, and leasebacks.
Do any of the above represent the creation of new wealth? Regan and Merrill Lynch are not bullish on creating wealth; they only come up with faster ways of extracting wealth from those who produce it. The extraction has progressed to the point that the American heartland is bled to death, gored upon the rack of necronomic decapitalism.
In addition, recall how one judge said Merrill Lynch's efforts to end a tax straddle fraud case were an attempt to "subvert the judicial process." Perusing the pages of the Wall Street Journal will reveal repeated occasions on which Merrill Lynch has tried to get a fast buck by skirting, ignoring, or buying legalities. The buying of legalities by monopolizing the ears of politicians is a way of justifying illogical business practices. It is safe to say that if there was one firm that orchestrated a lot of illogical, legal laws, it was Merrill Lynch. Furthermore, it is safe to say that Donald Regan bent more politicians' ears, directly and indirectly, than any other financier. If there is a brokerage firm that has destabilized America, it is Merrill Lynch under the tutelage of Donald Regan, and this man became Secretary of the Treasury!
As Secretary of the Treasury, Regan's philosophy was only an extension of the programs he implemented at Merrill Lynch: shifting rather than creating wealth. Besides having a professional orientation toward the mere manipulation of wealth, Regan had an extreme personal stake in Merrill Lynch: Regan's 1980 compensation from Merrill Lynch was $954,986, and he owned over "$10 million in Merrill Lynch stock."
How did we expect him to advise? Did we expect him to actively campaign against the abuses of tax straddles, "which his firm was instrumental in popularizing?" How did we think he would lead in terms of economic stability when his personal wealth was tied to the commissions that fund Merrill Lynch? Did he seek low rates of stock turnovers? Low turnover rates not only aid economic stability but are indicative of the long-term investment strategies that underlie economic stability. Or, did he prophesy that stock transactions would nearly triple in the near future indicating a rate of short-term speculation that generates and accompanies economic instability? His prophecy will be returned to later in this chapter.
Regan did not have a personal stake in national financial stability. By the nature of his income, his financial well-being actually depended on a cheapening of stability, whether he recognized or admitted it. For Regan, there was no blind trust: he knew where his money was.
Secretary of the Treasury
Regan's personal wealth depended on the number of stock transactions, regardless of whether the stocks were stale or fresh. Since the "new issue market" was dead (that is, fewer and fewer new stocks are being traded), his wealth depended on old stocks being traded as much as possible. People trade old stocks at faster and faster rates because of fear and because of financial instability. Regan would not afford to have economic stability. Consciously or unconsciously, his actions moved to prevent ideal economic stability.
This quote indicates that Regan had analyzed the Economic Recovery Act in terms its affect on his firm's source of income.
The sale of old, stale stocks does not put a single cent into production; stale stock transactions drain money from the sale of new, fresh stocks, as well as bonds and loans that could underwrite existing or new production. However, the sale of any stock provides a commission which will put a smile on any broker's mug. This was the sentiment of a comment appended to the above report on Regan's stock prophesy:
"You may not think Big Board volume is a major test of an economic package, but since commission income depends on trading volume rather than share prices, financial analysts certainly think it is."
Regan's projections should never have been construed as additional capital* formation for the industrial plants of America. For the production corporations to get money out of the stock markets, they must issue new fresh stocks. While you and I could trade a share of IBM stock back and forth a thousand times in one day and IBM would not get a cent for research and development--or anything for that matter. But the capital "handling" corporations such as Merrill Lynch would get rich on commissions.
It is not in the interest of stock brokers to formulate economic policies based on fresh stock issues, since a company can only expand so quickly. On the other hand, economic policies that increase the turnover of stale stocks greatly benefit stock brokers. In their attempts to get rich by increasing the turnover of old stale stocks, the brokers of America will, in fact, break America.
All the money tied up in stale stock speculation is money not going into fresh production. Regan talked of "capital formation" when he referenced future rates of stock turnover. In light of how the fire has faded "from the new-issues market," is it fair to conclude that Regan was actually talking about "capital handling" which increases neither production nor productivity? Excessive handling of old stale symbols of capital is not capital formation; it is capital de-formation. How did this man ever become Secretary of Treasury?
Of the two, which is worse for a person or a people: character defamation or capital deformation?* One is merely the distortion of the symbolic image. The other is the destruction of substance. Regan ideology was not that of economic stability. No doubt, if Regan had his way, he would want Americans to become either "day-traders" or "scalpers" as defined in the following:
Some have turned to day trading, buying or selling shares in the morning and closing out their positions in the afternoon, an activity only slightly more glamorous than scalping, in which a trader may hold a position for as long as forty-five seconds or so before closing it for an eighth or sixteenth of a point.
Is this any way to organize the "capital formation" of a nation? No, this process actually decapitalizes the nation of needed funds and human resources.
Other comments by Regan, while Secretary of Treasury, indicate that he either did not understand simple economic realities or deceitfully miseducated the public and the lawmakers. Consider the following comment: "Over the long term, Regan has said, the solution to the thrifts' problems lies in freeing them from interest-payment restrictions and in bringing down overall interest rates." This is another self-contradiction of the supply-side genre. On the one hand, he said that salvation lay in allowing interest rates to rise without restriction; in the same breath, he said that salvation could be found in lower overall interest rates. This is, no doubt, an example of the "magic of the marketplace" for which supply-siders have become famous. It is analogous to their position that you can simultaneously increase defense spending and lower taxes without any negative consequences.
As a financier, Regan should have recognized that loan interest rates could never come down if saving interest rates were allowed to skyrocket. Interest rates skyrocket if there are no legislative ceilings: banks make their money on the spread. Regardless of how high bankers bid the savings interest rates, they still control the money supply and are able to control the spread and the loan interest rates. Put simply, no ceiling on savings interest rates results in skyrocketing loan rates.
With no ceiling on savings rates, banks try to outbid each other for control of the available money by raising interest rates on savings. The more money a bank controls, the more easily it can set a large spread between what the money costs (the savings loan interest) and what the bank can sell the money for (the loan interest rate). Unfortunately, the bankers don't acknowledge that they strangle the economy with high loan interest rates. The best thing that Congress could do, in terms of loan interest rates, would be to order an across-the-board limit on savings interest rates of 2 to 4 percent. Loan interest rates would quickly drop to six to eight percent; similar decreases would occur in mortgage rates. But there is something better that concerned Americans can do in terms of interest rates (See "Producers' Refinance Fund").
Regan's motivation and leadership did not increase production per capita. He is not a capitalist. His actions have reduced wealth per capita. He fostered the concentration of wealth into the hands of a fewer few. Why would America have a decapitalist for Treasury Secretary? The most obvious reason for Regan was Ronald Reagan. America does not have a democratic process for collecting, filtering, percolating and honing the most productive people to the top policy-making positions. NUSA does.
Rationally and retrospectively, Reaganomics should be named after Donald T. Regan. The policies and programs of Ronald Reagan were merely an extension of the philosophy which Regan built at Merrill Lynch. Reaganomics helped the class of people that frequent Merrill Lynch, e.g., Donald T. Regan. The gist of "past private Reaganomics" is the content of the next major section.
Reganomics is the best description of the economic package pushed by the Reagan administration. Consider Regan's top role among the cabinet members:
Treasury Secretary Donald Regan is the top man in the cabinet. Staff members say Regan has spent more hours in the White House than any of his fellow department heads."
A short time later, the "uproar over Budget Director David Stockman leaves Treasury Secretary Regan clearly the dominant voice in setting economic policy."
Pre-White House Finances of Reagan
As the chief salesman of Reganomics, Reagan's own financial history clearly relevant. Most people know that Ronald Reagan never made it rich as an actor. His mediocre performances were a stepping stone for his interest in actor politics, e.g., becoming president of the actors' union. Most people know that Reagan was a millionaire by the time he was elected president, but few know the questionable details of how he acquired his wealth. It wasn't from the movies! For a nice overview from an unquestionable source, check the August 1, 1980 issue of The Wall Street Journal.
The major revelation is that Reagan became a millionaire through the sale of a rocky, noncommercial chunk of land. The average slope was 31 degrees on more than 60% of the land. An old connection of Reagan's (20th Century Fox) bought the land a month after he was elected governor. One questionable aspect of this sale, besides the timing, was that he was paid $8,178 per acre for noncommercial property. This sale price, characterized by one county appraiser as not being "a fair-market sale," was a 3400% increase over the price that Reagan had paid for it a few years before.
Another questionable, but legal, aspect of the sale arose when the State of California bought the land from Fox studios the year that Reagan left office. While the Journal reported a sales price of only $1,800 per acre, the NBC nightly news in mid-January 1981 reported the price at being about $25,000 per acre or $5 million total.
Reagan's involvement with questionable land deals did not stop when he entered office. The sale of his Pacific Palisades home again raises questions about the source of his wealth. Were it not for the sharp eyes and integrity of one person, Reagan's home would have been sold at two prices: $1,930,000 and $1,030,000. The lower price was apparently for tax purposes which would have saved Reagan about $250,000 in capital gains taxes. The party responsible for the duplicity was not revealed.
There are other secretive aspects of Reagan's financial history. Some of these involved suspicious dealings with hush-hush corporations run by "friends of the family." Reagan's shyness about the administration of his personal finances should have prompted questions from even the most complacent of citizens. These insinuations are not without substance. Construct your own bibliography of Reagan's finances and you will see why he supported the elimination of public reports of fraud by the Security and Exchange Commission and the repeal of the Foreign Corrupt Practice Act.
It is easy to get rich when one is able to gain from legal, but questionable land transactions. It is also helpful not to pay one's fair tax share of funding economic stability. During Reagan's governorship of California, it was revealed that he did not pay any taxes for at least one year, despite his wealth. Reagan's tax avoidance did not end when he left the governorship. For instance, Reagan paid only $4,736 in real estate tax on both of his properties in 1979. This total makes the tax rate seem ridiculously low given the nature of the properties:
his Pacific Palisades home ("easily worth" $500,000, and advertised for about $2 million) ... his Rancho del Cielo which was purchased for $526,000 in 1975.
Many Americans were paying that amount of tax on property worth only 1/20 of Reagan's property. Evidence that Reagan received tax favors was provided by the realtor for the home who stated that taxes on that piece of property would be about $19,000: Four times what Reagan paid on both pieces of property.
The worse part of private Reaganomics was not Reagan's escape from his fair share of taxes, but his financial philosophy. It can be best described as "financial hydrocephaly," and puts Reagan in league with Regan's decapitalism. Reagan offered his philosophy at numerous gatherings before he officially started running for President, advising "his listeners that volatile conditions at the time of the seminars made it more prudent to build liquidity."
Liquidity is the avoidance of long-term investment. Should America have expected an end to volatile conditions with Reagan? No. We had a President who preached and privately practiced liquidity (he sold his stock holdings). He instituted national liquidity: Reaganomics.
Philosophically, you can't teach old dogs new tricks, especially when they have aged passed their window of vulnerability to new information. America was saddled with a President suffering from financial hydrocephaly. He spread it legally and forcefully throughout the land by his programs and speeches.
Like Regan, Reagan could not change the laws to benefit the production side of the economy without affecting his personal finances and reversing his long-standing professional philosophy. For Reagan to have supported legislation for proper taxation of his real estate would have caused a decrease in its "market" value; it would have meant that his multi-million dollars were subject to more than four thousand dollars in taxes a year.
He also did not get taxed on the full amount of his gains on his million dollar stock sale. We could hardly expect him to alter the laws so that traders of stock certificates would pay their pragmatic share of benefiting from economic stability. Consider this statement from 1981: "The big plus in the Reagan plan is a cut from 70 to 50 percent in the top tax rate on non-wage income such as interest, dividends and profits from the sale of stock." Under Reaganomics, more of the tax cost of funding America was shifted to the wage earners, since it was shifted away from those with "non-wage" income.
Reagan further claimed that the $800,000 in private donations for refurbishing the White House didn't cost the taxpayers a cent. Wrong. Those tax-exempted donations cost the Treasury about $300,000 in lost revenue.
Clearly, Reagan's concern for those above the 50% tax bracket was not without a personal motivation. When Reagan wrote a law benefiting those people, he was writing one for himself. Eisenhower used the White House as a ticket to all the golf courses, but Reagan used it as a ticket to all the tax laws.
Summary: A Larger Garbage Dump
Consider the personal and professional histories of both Reagan and Regan in their acquisition (not production) of wealth. Consider their roles as chief financial architects of the nations' financial policies during the 1980s. Is there any wonder that Reaganomics and Reganomics have failed us? A something-for-nothing philosophy is legal theft; to make it a national policy is to make us a nation of thieves. A national policy of subtle legal theft cannot succeed, for if we are all thieves, there will soon be nothing to steal.
America is controlled by people who have made their wealth by systematically avoiding taxes, personally and professionally. Reagan and Regan thought that their way of getting rich would make America rich if instituted on a national level. Clearly, that is not the case.
Reaganomics continued to strangle the creation of wealth by increasing the control of the existing wealth by a fewer few. Legalizing illogical tax avoidance on a grand scale was but one prong of Reaganomics. The increased tax evasion by those who already had little or no tax burden created an economic cancer that is presently consuming America. These people have used their tax-exempted wealth to buy the White House to ensure rapid institution of more tax exemptions and loopholes.
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