Has George Osborne been taking Trans-Atlantic lessons from Jude Wanniski and the Republicans?

Many commentators have been puzzled by George Osborne’s management of the economy… Others share cartoonist Martin Rowson’s assumption that this is a ‘wrecking’ government implementing ‘scorched earth policies’ (see ‘anti-cuts protest’s ‘hooligan’ minority’) (1)

‘What is George Osborne playing at?’ (2) offers some of the ways in which Osborne is deliberately undermining the economy but I accept that it all sounds extraordinary.. Why on earth would he/they be doing that? How do the Tories ever expect to be re-elected? What’s the rationale, the reasoning behind their actions?

Looking across at the States, Michael Meacher sees the increasing similarities between the plans of Mitt Romney’s running mate, Paul Ryan, and the tactics of George Osborne et al in the UK (3). Think Left also highlighted the parallels between the political views of George Osborne and Paul Ryan (4).

Paul Ryan is said to be an ardent Ayn Rand advocate … but forget that… whether Osborne or Ryan know it or not, the really significant person of influence is Jude Wanniski.

Who is Jude Wanniski?

Jude Wanniski was the originator of the ‘Two Santa Clauses’ Theory. His notion was that the Democrats acted like Santa Claus, when they got into power, because they would put in place Social security, unemployment benefit and invest in massive infrastructure programmes which created employment. Wanniski’s argument was that the Republicans had to find a way to ‘out-santa’ the Democrats because they were constantly wrong-footed by the fact that:

‘the Democrats kept raising taxes on businesses and rich people to pay for things…. and that made them seem like a party of Robin Hoods, taking from the rich to fund programs for the poor and the working class. Americans loved it.’*

Thom Hartmann explains Wanninski’s ‘Two Santa Clauses’ theory and how it has allowed the Republicans to con America for the last 30 years (5). I have quoted at length from his article but the original is well worth reading:

‘Wanniski decided to turn the classical world of economics … on its head. In 1974 he invented a new phrase – “supply side economics” – and suggested that the reason economies grew wasn’t because people had money and wanted to buy things with it but, instead, because things were available for sale, thus tantalizing people to part with their money. The more things there were, the faster the economy would grow.

At the same time, Arthur Laffer was taking that equation a step further. Not only was supply-side a rational concept, Laffer suggested, but as taxes went down, revenue to the government would go up!

Neither concept made any sense – and time has proven both to be colossal idiocies – but together they offered the Republican Party a way out of the wilderness…..

There was no way, Wanniski said, that the Democrats could ever win again. They’d have to be anti-Santas by raising taxes, or anti-Santas by cutting spending. Either one would lose them elections….

When Reagan rolled out Supply Side Economics in the early 80s, dramatically cutting taxes while exploding (mostly military) spending, there was a moment when it seemed to Wanniski and Laffer that all was lost. The budget deficit exploded and the country fell into a deep recession – the worst since the Great Depression – and Republicans nationwide held their collective breath.

But David Stockman came up with a great new theory about what was going on – they were “starving the beast” of government by running up such huge deficits that Democrats would never, ever in the future be able to talk again about national health care or improving Social Security – and this so pleased Alan Greenspan, the Fed Chairman, that he opened the spigots of the Fed, dropping interest rates and buying government bonds, producing a nice, healthy goose to the economy. Greenspan further counseled Reagan to dramatically increase taxes on people earning under $37,800 a year by increasing the Social Security (FICA/payroll) tax, and then let the government borrow those newfound hundreds of billions of dollars off-the-books to make the deficit look better than it was.

Reagan, Greenspan, Winniski, and Laffer took the federal budget deficit from under a trillion dollars in 1980 to almost three trillion by 1988 …They and George HW Bush ran up more debt in eight years than every president in history, from George Washington to Jimmy Carter, combined. Surely this would both starve the beast and force the Democrats to make the politically suicidal move of becoming deficit hawks….

Ed Crane, president of the Libertarian CATO Institute, noted in a memo that year: “When Jack Kemp, Newt Gingich, Vin Weber, Connie Mack and the rest discovered Jude Wanniski and Art Laffer, they thought they’d died and gone to heaven. In supply-side economics they found a philosophy that gave them a free pass out of the debate over the proper role of government. Just cut taxes and grow the economy: government will shrink as a percentage of GDP, even if you don’t cut spending. That’s why you rarely, if ever, heard Kemp or Gingrich call for spending cuts, much less the elimination of programs and departments.”

George W. Bush embraced the Two Santa Claus Theory with gusto, ramming through huge tax cuts … and blowing out federal spending. Bush even out-spent Reagan, which nobody had ever thought would again be possible.

And it all seemed to be going so well, just as it did in the early 1920s .. inflating a bubble that … would have to burst….

The Republicans got what they wanted from Wanniski’s work. They held power for thirty years, made themselves trillions of dollars, cut organized labor’s representation in the workplace from around 25 percent when Reagan came into office to around 8 of the non-governmental workforce today, and left such a massive deficit that some misguided “conservative” Democrats are again clamoring to shoot Santa with working-class tax hikes and entitlement program cuts.’…..

The Two Santa Claus theory isn’t dead, as we can see from today’s Republican rhetoric. Hopefully, though, reality will continue to sink in with the American people and the massive fraud perpetrated by Wanniski, Reagan, Laffer, Graham, Bush(s), and all their “conservative” enablers will be seen for what it was and is. And the Obama administration can get about the business of repairing the damage and recovering the stolen assets of these cheap hustlers.

Published on Monday, January 26, 2009 by CommonDreams.org

The greatest significance in this history is how the Republicans have deliberately ‘wrecked’ the economy so that any incoming Democratic government would be hamstrung from implementing their social programmes, and could instead be ‘forced’ into making huge cuts/ increasing taxes in their efforts to return to the US to economic sanity.

I suspect that this is the over-riding explanation behind the deliberate ‘wrecking’ of the UK economy, along with the dismantling of the welfare state, the selling off of assets and the locking in of long-term contracts with transnational corporations who come under the jurisdiction of the EU and the WTO. It is to ‘stitch up’ any future government…

The Tories know that they have been in decline since the 1950s. Gerry Hassan who charts the ‘Strange death of Tory England’ (6) suggests that the future:

‘…holds the prospect of the Tories becoming a ‘zombie party’, more and more divorced from reality and shaped by its own partisan obsessions. This will entail embracing an unapologetic and dogmatic failed Anglo-American capitalism which does not deliver for most people, instead producing middle-class mass anxiety, widespread poverty and exclusion, and an entitlement culture in the super-rich…. In this they will be in the company of their cousins the US Republicans who have become prisoner to corporate finance and ideological zealots…The Tory future is one of very few members, atrophied grass root associations, and a professionalised, paid politics: the party reduced appropriately to an offshoot of Serco and G4S and the free market vandalism politics they have personified… This will be a politics for the City, by the City, funded by the City – a caricature of the measured Tory politics of the Macmillan and Home era – but the inevitable result of Thatcher and Cameron.

The Wanniski elements are all in the Osborne plans. The focus is on ‘supply-side’ measures when the issue is clearly a lack of demand. The use of the improbable, and unproven, Laffer Curve, to argue that the top tax rate should be reduced to 45% to stimulate growth, and the discredited theory of ‘trickle down’.

There has also been the dramatic increase in public sector pension contributions which could be used in the same way as ‘Greenspan … counseled Reagan to dramatically increase taxes on people earning under $37,800 a year .. and then let the government borrow those newfound hundreds of billions of dollars off-the-books to make the deficit look better than it was..’.

As Michael Burke has demonstrated the Post Office pensions pot has already been used by Osborne to say that he has cut the deficit! (7) And then there is the un-utilised £31 billion, identified by Neil Wilson (2) which will doubtless be released at the appropriate time to ‘demonstrate’ that the coalition’s ‘austerity plans’ have worked.

‘Bush pushed through, utterly irresponsibly, enormous unfunded tax cuts and hugely expensive unfunded wars. This was not a reluctant necessity of the times. It was a deliberate policy of cutting revenues (tax cuts for the super-rich) and feeding the Pentagon (Iraq and Afghanistan) precisely in order to drive up the deficit and thus justify cuts in spending. Similarly for Osborne the financial crash has been a boon – by ‘compelling’ him to cut the deficit drastically.’ Michael Meacher (3)

Richard Murphy quotes from a beyond-the-paywall FT article (8) by John Authers who argues that the issue at the core of the US presidential election debate will be between:

… a distinguished tradition that holds that cutting taxes for the wealthy creates incentives for greater profits, and wealth creation. It is hard to combine deficit hawkery with advocacy of tax cuts even for the wealthiest in society – as it appears the Republican ticket will do – without believing this to be true.

There is also a tradition in economics holding that cutting taxes for the wealthy will not stimulate growth. These two schools will argue it out for the next three months.

Richard Murphy concludes:

And that, in my view, is what modern political corruption is: the advocacy of policy from a position of power created by the capture of wealth even when you know that policy won’t work and you’re only suggesting it for the sake of your own private gain. (8)

Unfortunately, the current LP with its ‘cuts are too deep and too fast’ stance shows all the signs of being like ‘the Democrats [who are making] the politically suicidal move of becoming deficit hawks….’ Hopefully, though (as Thom Hartmann concludes his article) reality will continue to sink in with the [UK] people and the massive fraud perpetrated by [Osborne, Cameron], and all their “conservative” enablers will be seen for what it was and is… And the Labour Party will find the route to fulfilling its real purpose to improve the lives and well-being of the 99%.