John Christensen ■ FREE LUNCH THINKING: How Economics Ruins the Economy
This review of Tom Bergin’s new book, Free Lunch Thinking: How Economics Ruins the Economy, was originally published in the Black Lives Shattered edition of our flagship publication – Tax Justice Focus. Tom was also interviewed for the March 2021 edition of the Taxcast, which you can listen to here.
By John Christensen
In October 2000 I went climbing in the Trossach mountains with Margaret Thatcher’s supply-side economics guru, Patrick Minford. He was fascinated by tax havens, waxing on about how tax competition forces governments of other countries to lower taxes on capital and substitute consumption taxes like VAT, which he considered somehow ‘fairer’. Low taxes, he enthused, encourage wealthy people to invest more, while also encouraging ‘wealth-creators’ to work harder. Better still, tax cuts yield increased government revenues thanks to a mysterious alchemy called the Laffer Curve. What could be more seductive than that? Politicians on both right and centre-left lapped up these supply-side nostrums, which by now, as Tom Bergin notes in this excellent book, have become “so embedded in the DNA of classical and neoclassical economic theory that (they are) difficult to shift.”
Shift they must, however, because despite all the enthusiasm of supply-side theorists, their ideas simply don’t reflect observable reality. In practice, business surveys from the 1960s onwards have shown that tax rates have no or minimal influence on investment in new equipment, or research, or training, or anything to do with the productive economy. Nor is there evidence to support the idea that high taxes deter people from working. Nor for that matter, has slashing corporate tax rates led to higher wages for workers (disproving the half-baked ‘incidence’ arguments touted by the Oxford Centre for Business (non)Taxation, a lobby group).
A cottage industry of economic modellers has purported to show that low taxes generate rapid growth and high taxes lead to stagnation. For decades, supply-side economists waited for really existing neoliberalism to prove them right. But the evidence suggests otherwise, and the models have been quietly abandoned.
But lack of evidence has never deterred the corporate shills or snake-oil economists, and Art Laffer’s ideas live on, for example in Prime Minister Johnson’s enthusiasm for re-introducing freeports to the UK, another idea carried forward from the 1980s despite plentiful evidence that they really didn’t work back then. Still, as Einstein argued, it takes madness to repeat an experiment in the expectation of a different result second time round.
Free Lunch Thinking is a fascinating deep dive into the history of how the economics of tax policy has been (mis)shaped by supply-side thinking. An early experiment in radical tax-cutting by US Treasury Secretary Andrew Mellon, a banking tycoon, serves as a fine example, or horrible warning, of how tax cuts play out in the real economy. Over the course of the 1920s Mellon slashed income tax rates for wealthy Americans; stockbrokers jived down Wall Street, and tax revenues rose. Vindication for the supply-siders? Well, as everybody knows, it didn’t end well, and Mellon’s reputation for economic acumen was trashed as a result.
In the decades following the Wall Street crash, the ideas of British economist John Maynard Keynes came to the fore. Keynes was concerned with demand, and saw the state as a key agent in regulating economies to avoid boom and bust. According to Keynesians, Mellon got things completely out of synch: when the economy was booming in the mid-20s he should have raised taxes to withdraw demand from the economy. When Wall Street went bust he should have injected demand by increasing expenditure at ground level. In economics-speak, he exacerbated the crisis by applying pro-cyclical rather than counter-cyclical measures. Mellon is mainly remembered for catastrophic mismanagement.
Yet come the 1970s, Keynesian demand management policies struggled with both weak growth and rising inflation, a combination known as ‘stagflation’, and as the OPEC-induced oil crisis caused private investment in both the UK and USA to slump, supply-siders waiting in the wings pushed hard to rehabilitate Mellon’s ideas. At that time, supply-siders were widely dismissed as “charlatans and cranks”, and in 1980 Vice President George H. W. Bush famously described Laffer’s curve as “voodoo economics”. Ronald Reagan, however, and successors such as Donald Trump, thought otherwise.
Indeed, Trump, took advice from Art Laffer before and during his Presidency and awarded him the Presidential Medal of Freedom, the United States’ highest civilian honour, in 2017. That same year Trump made the Tax Cut and Jobs Act the centrepiece of his economic policies. Biden, of course, must reverse that act without delay to avert disaster in the coming years.
Despite scepticism among most economists, since the 1980s supply-side ideas, and tax cuts in particular, have become the mainstay of conservative economic thinking. Even in the face of the catastrophic banking crash of 2008, the conservative response was to impose austerity on the poor and tax cuts for the rich. Needless to say, the promised private investment-led recovery was feeble, real wages continued to stagnate, private and corporate debt rose steeply, and inequality reached alarming peaks.
So is Bergin justified in arguing that economics has ruined the economy? I mulled this question as I walked across the snowbound Chiltern hills this morning. On reflection I think his accusation stacks up. Pre-Covid, supply-side thinking remained the dominant narrative and heterodox economists, including me, struggled to persuade politicians and the wider public that tax policies need a comprehensive rethink. The pandemic might prove a game-changer in this respect.
As you’d expect from an award-winning journalist, Bergin combines evidence and anecdote into a rich and highly readable book about the theoretical underpinnings of tax injustice, making this an invaluable read for the tax justice community. Make space for it alongside your other lockdown reading.