Hal Masover, CRPC®
Last month we looked at the economic record of the two major political parties. If you missed it, don’t worry. This article does not require having read the first one.
But to recap last month, in the last 100 years Republicans have held the White House for 48 years and Democrats for 52.1
There have been 16 recessions and 1 depression. The Great Depression and 12 of the 16 recessions started during Republican administrations. Further – either a recession or a depression occurred during every Republican administration of the last 100 years.2
Why?
Last month our task was simple. Match up two sets of dates. The dates of presidential terms with the beginning dates of recessions and depressions. There’s no ambiguity. Recessions are all dated by the National Bureau of Economic Cycles and presidents serve from the time they are inaugurated until the next president is inaugurated. Easy peasy and the data is very lopsided in favor of Democrats being better for the economy.
An exhaustive look at this would cover the full century that we covered in our last article. But for this article I’m going to start with Ronald Reagan. Reagan embraced the economic theory put forth by Professor Arthur Laffer. In simple terms, Laffer’s theory, referred to as the Laffer curve, was that cutting taxes would stimulate the economy and that the treasury would not lose any revenue. This is because the growth produced by the faster growing economy would in turn be taxed – and even though the rate would be lower, since more money was being taxed, there would be no budget shortfall.
Armed with this idea Reagan pushed through a large tax cut bill and it worked extremely well until it didn’t. The Reagan tax cuts resulted in a then record high budget deficit. What is now all but forgotten is that to correct that deficit, in 1982 and 1985 the Reagan administration passed the largest peacetime tax increases in history.
But I digress. The main point here is to look at who benefits most from tax cuts, and that’s obvious. Taxpayers. And the higher up the income ladder you go an interesting thing happens. Tax cuts that benefit those that are already wealthy are not a very efficient way of stimulating the economy. The reason is that people in upper income levels mostly already have everything they need. Some of the extra money they keep as a result of lower taxes gets spent, some of it gets invested and some of it gets saved. Savings do not stimulate the economy. Actually, the opposite. Savings are monies that are temporarily taken out of the economy. It’s in storage for future use. As such, savings are a deflationary force on the economy.
Contrast this with the favored way for the Democrats to stimulate the economy – spending. Government spending has the virtue of directly creating jobs. The Biden administration recently announced a $1.5 billion grant to Global Chip Foundries, a New York State based chip manufacturer, to help them build an advanced foundry in upstate New York that is expected to create 1,500 permanent jobs and an additional 9,000 construction jobs.
This is an extremely efficient economic stimulus because that $1.5 billion is money that will be spent in the economy buying supplies, paying salaries and companies.
The Republican ideal is that if we leave more money in the hands of individuals and companies, they are in a better position to know how it should be spent and that government should not be entrusted with those decisions. It’s hard to disagree with that notion. But in action, it doesn’t have the power of direct investment into the economy like the Biden administration’s Chips Act.
To restate – tax cuts stimulate the economy – direct infusion of money into the economy via government spending programs stimulate the economy more.
When money is spent, it circulates in the economy. Some estimate that money spent circulates 14 times in the economy so government spending can be very stimulative.
When money is saved it does very little for the economy. When you save money, you basically take a pile of money and put it on the shelf. Someday, probably years from now, it may be spent and at that time become of benefit to the economy. But today it is of almost no help at all. Since tax cuts result in more savings than government spending, tax cuts are not the best way to stimulate the economy.
So now you have at least one possible explanation of how it could be that every Republican administration of the last century has had a recession, or a depression begin on their watch while there have been no recessions in any Democratic administration of the last 44 years.
But spending has to be paid for, and so do tax cuts. That’s why the national debt has grown in every one of the last 24 years. We’ve been happy to make stimulative measures of all kinds. Paying for it? Not so much. The last president to oversee a decline in the national debt was Democrat Bill Clinton. At some point in the coming years our deficit happy government will have to take measures to reign in the debt. But that’s another subject. And if I’ve brought up a new worry for you, I would refer you back to my March column earlier this year.
1 https://www.britannica.com/topic/United-States-Presidential-Election-Results-1788863
2 https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556.
Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated.
Comments and questions can be sent to hal.masover@emailsri.com These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.