Pawlenty bets big on Reaganomics, but some economists say it won’t work

Tim Pawlenty
Tim Pawlenty

WASHINGTON — On a symbolic stage in Chicago, Tim Pawlenty doubled down on trickle-down Reaganomics,  pitching a plan to dramatically overhaul the nation’s spending with sweeping tax cuts and a fundamental re-think of how the federal government operates.

But for Pawlenty’s very optimistic plan to work, experts say he’ll have to engineer the greatest expansion of the U.S. economy in modern memory (by far). And many of his ideas, while they may sound good individually, coalesce into an economic plan that one economist said would put the country in “exactly the wrong direction.”

The University of Chicago is known as a hub of free-market economic theory, and Pawlenty on Tuesday began by noting how appropriate that, for that reason, his speech was appropriate to be delivered there.

And it was there that Pawlenty offered up his own economic prescription. “We can fix our economy,” he said. “Our people are ready to get back to work. We just need to give them to tools to get there. And get the government out of the way.”

Unsaid, but understood by all, is the symbolism Pawlenty’s location has to the Obama administration he hopes to evict.

The university sits in Hyde Park, a south side Chicago neighborhood that’s also home to one Barack Obama. The first lady, Michelle Obama, had been a top leader at the school’s medical center, and Obama’s top economic adviser, Austan Goolsbee, came from that university (and, the day before Pawlenty spoke there, announced he’d be leaving to resume teaching there).

And while Pawlenty offered up a stinging rebuke of Obamanomics, experts say the numbers in his own plan don’t really work.

“There are some good elements, but the basic thrust of Pawlenty’s argument is exactly in wrong direction,” said Charles Ballard, a political economist at Michigan State University. Pawlenty’s plan, he said, would increase income gaps between the very top earners and everyone else.

“Basically, Pawlenty’s policy proposal is trickle-down economics on steroids. In terms of generating increased inequality of income and wealth, it is an excellent set of policies. But it has rather little to offer for the bottom 90 percent of households.”

Steve Smith, a Minnesotan who directs the Weidenbam Center on the Economy, Government and Public Policy at Washington University in St. Louis, said Pawlenty’s “substantive problem is the basic formula: lower taxes equals faster economic growth.”

“The high growth periods that Pawlenty cites were periods in which marginal tax rates (and tax receipts as a percent of GDP) were higher than they are now. This formula works for Republicans, who, by and large, want taxes and spending cut in a way that leads to a balanced budget.”

Simplified tax code with huge tax cuts
Pawlenty’s tax plan starts with giant cuts, particularly for businesses and those in what’s known as the investor class. Here’s the blueprint:

  • Corporate tax rates shrink to 15 percent, from 35 percent now.
  • That cut will be offset somewhat by what Pawlenty says will be cuts to subsidies, like the ones on ethanol he’s called for doing away with. “The tax code is littered with special interest handouts, carve-outs, subsidies and loopholes,” he said. Exactly how deep he’s going here is unknown (and I’ve asked, many times), so it’s hard to estimate how much he’d get out of this.
  • Individual tax rates shrink down to two: The first $50,000 ($100,000 for married couples) in income would be taxed at 10 percent. And income above that would be taxed at 25 percent — and companies that currently fall under individual income-tax guidelines could opt out and choose the lower corporate tax rate of 15 percent.
  • Pawlenty does away with a host of taxes that benefit high-income earners and investors: Capital gains, dividend, estate and interest income taxes all go to zero.

“Once we unleash the creative energy of America’s businesses, families and individuals, as we did in the eighties and nineties, a booming job market will reduce demand for government assistance,” Pawlenty explained. “And rising incomes will increase federal revenues.”

It’s the classical cut-taxes-raise-revenues defense, but it’s one that hasn’t worked recently, as Slate’s Dave Weigel pointed out. “Our experience since 1982 is that income tax cuts don’t actually increase revenue. See: the decade between 2000 and 2009, which Pawlenty does not mention here.” 

Ballard doesn’t follow Pawlenty’s logic either. “I don’t see a revenue estimate for Pawlenty’s tax proposals, but my guess is that they would substantially reduce tax revenue, even below today’s level, which is lower than it has been in the U.S. for decades, and far lower than in most other developed countries,” he said.

“If we have even less tax revenue, and if we want to reduce deficits, we have to cut spending, dramatically. Pawlenty talks about cutting Amtrak and the Government Printing Office, but these are chump change. The big money is in Medicare, Medicaid, Social Security, national defense, and interest on the national debt.”

Pawlenty’s cuts to discretionary spending would be big. He looks for a freeze until there’s a balanced budget, and wants additional presidential prerogative to demand across-the-board cuts if needed. There would be efficiency redesigns of federal agencies — think Six Sigma, which Pawlenty cited specifically — that he estimated could save up to 20 percent of costs.

He calls for wholesale cuts to or privatization of any service that he feels could be duplicated by the private sector, citing the U.S. Postal Service, Amtrak and Fannie Mae/Freddie Mac (which underwrite much of the U.S. mortgage market) as examples.

But Medicare, as a word, didn’t feature in Pawlenty’s speech at all, though he’s expected to roll out a plan for that in the weeks to months ahead. On Medicaid, Pawlenty said he’d support capping that spending and block-granting it to states, while he’s called for means-testing Social Security cost-of-living increases and raising the retirement age for younger workers who haven’t hit that benefit yet.

Pawlenty, to the great ire of the folks at the Cato institute who otherwise have praised him extensively, won’t touch the Defense baseline spending at all.

Is this explosive growth realistic?
So where does Pawlenty achieve big savings? Sustained, explosive growth, to the tune of 5 percent a year.

“Five percent economic growth over 10 years would generate $3.8 trillion in new tax revenues,” Pawlenty estimated. “With that, we would reduce projected deficits by 40 percent, all before we made a single budget cut.”

Aiding that, he said, would be a streamlining or rollback of many federal regulations, doubling U.S. exports through additional free trade agreements and strengthening the dollar (the latter two policies are somewhat antagonistic, but not insurmountably so). 

But the big fish here is regulatory reform. “The fact is, federal regulations will cost our economy $1.75 trillion this year alone,” Pawlenty said. “It’s a hidden tax on every American consumer, built into the price of every good and service in the economy.”

Taking all that into consideration, tax cuts, spending cuts, reforms, all of it, Pawlenty projects 5 percent growth sustained over 10 years. And that, he says, will bring in a whopping $3.8 trillion in revenue.

Again, we haven’t seen the specific projection breakdowns so I can’t say if that growth equals that take-in (and at what estimation, given his overhauls).

But I can say with certitude that his asked-for amount of growth is staggering. To give a perspective on the sheer bigness of it, the last time the economy topped 5 percent year over year was 1984. And as for sustained growth of that level over 10 years? Pawlenty says it’s been done before, but there’s actually not an analogous time in recent memory

The Washington Post’s Ezra Klein was unyielding in his criticism: “This plan isn’t optimistic. It isn’t a bit vague. It’s a joke. And I don’t know which is worse: The thought that Pawlenty knows that and went forward with this pandering, fantasy-based proposal anyway, or the thought that he doesn’t know it, and he really thinks this could work.”

If Pawlenty’s growth goal were lowered a little bit, however, then it’s not so pie-in-the-sky.

”I think it would be more reasonable to set the bar a little lower, at four percent,” Ballard said. “We have achieved 4 percent growth in 20 of the last 50 years.” That’s most of the Kennedy and Johnson administrations, a minority of the Nixon, Ford and Carter years, half of Reagan’s time and a slim majority of the Clinton years.

‘Reaganesque’ say Republicans; ‘Disaster’ say Democrats
Political reaction predictably came down in two camps: Republicans seemed pleased with Pawlenty’s approach, while Democrats scolded him for what they branded irresponsibility.

“I think it’s great, I think he’s right on the right track,” said Art Laffler, a former economic adviser to Ronald Reagan, in an interview with Fox News’ Neil Cavuto. “This type of growth agenda is exactly what’s needed, and I think Tim Pawlenty’s exactly on track with this proposal.”

Larry Kudlow, a CNBC host who was also a Reagan economic adviser, loved it, tweeting that it was a “dynamite Reaganesque speech” by Pawlenty. His final assessment: “Wow.”

Democrats used their rebuttals to tie Pawlenty to two Republicans: Paul Ryan and George W. Bush.

“It’s basically kissing cousins with Paul Ryan’s plan,” said Bill Burton in an interview with MSNBC. Burton, a U alumnus who is co-founder of the liberal super PAC Priorities USA and former White House deputy press secretary in the Obama administration, did not mean that as a compliment.

“Tim Pawlenty’s plan to extend and expand the Bush tax cuts, deeply slashing taxes paid by the wealthiest Americans and corporate America and sending our deficit soaring even higher, is not an economic plan, it’s a prescription for economic disaster that would fall squarely on the backs of seniors and working families,” said Debbie Wasserman Schultz, chair of the Democratic National Committee.

“Mr. Pawlenty would take the Republican policies of the last decade, which exploded our deficit and debt and nearly sank our economy into a second Great Depression, and inject them with steroids.”

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Comments (15)

  1. Submitted by Dennis Tester on 06/08/2011 - 08:52 am.

    “Charles Ballard, a political economist at Michigan State University. Pawlenty’s plan, he said, would increase income gaps between the very top earners and everyone else.”

    A “political economist” is a polite term for Marxist. In a free society, the objective is individual freedom, not equality. If one man has more initiative, takes more risk, and works harder than another guy, should that be a punishable offense?

    And to those who claim that “tax cuts don’t create jobs” are you prepared then to say that tax increases do? Are they suggesting that the 35% corporate tax rate be raised? Is that it?

    We have the 2nd highest corporate tax rate in the world (used to be the highest until recently) and yet some people are wondering out loud why American companies choose to create jobs elsewhere.

  2. Submitted by Ron Gotzman on 06/08/2011 - 09:34 am.

    I like T. Paw’s plan. However, I am sure it will not elicit much support from MinnPost readers.

    What we can all agree on is the failure of the Obama plan. After 5 trillion dollars of deficit spending, bailouts of all the Obama special interests groups, government growth on steroids, the economy is still awaiting the promised “summer of recovery.”

    Pawlenty’s plan vs. the Obama plan? We already know which plan as failed.

  3. Submitted by Nathan Roisen on 06/08/2011 - 09:46 am.

    The actual corporate tax rate is one thing, the effective rate that corporations actually pay is another entirely.

    The United States government collects about 28% of the national GDP in taxes, which places us toward the bottom of OECD countries. Most European countries, for instance, collect 35%-45%.

    It isn’t much of a mystery why companies are creating jobs elsewhere, and tax rates truly aren’t at the top of the list. First, emerging markets are the growth areas for big business, which wants to locate near its customers. Second, labor is much, much cheaper overseas.

    Neither of those factors are things the US government can do much to meaningfully effect. What is needed to remain competitive is to press our advantages in other areas – infrastructure, education, quality of workforce, quality of life.

    Oh wait, infrastructure spending in the US lags far behind Europe and Asia, and really isn’t enough to maintain what already exists, much less improve it. And the cost of higher education is skyrocketing as the quality of primary education lags. And our population is less healthy (despite paying far more for health care) than our peer nations.

    These are very real problems that simplistic mantras of CUT TAXES and LET THE PRIVATE SECTOR TAKE OVER cannot address. Sorry.

  4. Submitted by jack nutter on 06/08/2011 - 11:18 am.

    For an evaluation of the Pawlenty tax plan go to jacknutter.com or link to http://www.marketwatch.com/story/grading-the-pawlenty-tax-plan-2011-06-08

  5. Submitted by Bruce Johnson on 06/08/2011 - 12:16 pm.

    re: #1: taxes on corporate income = “punishable offense.” Nice reduction, there. With this kind of “thinking”, what could possibly go wrong?

  6. Submitted by RB Holbrook on 06/08/2011 - 01:48 pm.

    Wow! With the incalculable wealth the Pawlenty plan will generate, I’ll be able to buy that pet unicorn I’ve been wanting!

    Why does anyone even take the time to consider this plan? Reaganomics did not work under Reagan, so why does this tinhorn think he can make it happen? Cutting taxes does not increase revenue. Cutting revenue does not unleash the forces that will lead us to peace, prosperity, and health. That should be well understood by anyone who has been paying attention for the past three decades.

  7. Submitted by Thomas Eckhardt on 06/08/2011 - 02:12 pm.

    If his plan is based on 5% growth for 10 years then it’s a failure right out of the gate. The statistics say the best we could expect would be 4 of 10 years.

    “If one man has more initiative, takes more risk, and works harder than another guy, should that be a punishable offense?”

    No, it shouldn’t. Likewise, if one man is lazy and nonproductive and lives off the dividends and interest of the wealth created by his parents, should he be granted special exemptions to avoid taxes?

    There you go Dennis, one straw man for another.

  8. Submitted by Tom Bartel on 06/08/2011 - 03:10 pm.

    “Some economists” think Reaganomics don’t work. I would submit that we have about 30 years of evidence that “some economists” are right.

  9. Submitted by Lance Groth on 06/08/2011 - 03:30 pm.

    What’s concerning here is that, in general, I don’t think Pawlenty is stupid. The alternative, then, is that he is willing to peddle pure b.s. to a gullible public for the sake of his own political ambition. It has been clear for many years that he has no true convictions; he’s one of those who holds his finger up to the wind and tacks hard whichever way he perceives it to be blowing. Ideas he once championed, such as climate change mitigation or ethanol subsidies, are now evil because they’re unpopular with his base. Despite his budget cutting fervor, he won’t touch the big daddy of all budgets, Defense, because he mistakenly views national security as something Repubs own. Neither does he mention Medicare out of political cowardice, because he knows the crapstorm that will descend on him if he does. Yet with the rise of the TP’ers, he has otherwise tacked ever harder to the Right.

    The man is a reed in the wind and soulless to boot, having sold his on the alter of his ambition. He likes to cite his blue collar upbringing, yet every policy position he takes shows he has turned his back on the poor, the sick, the blue collar workers, the average joes. He’s quite happy to see the richest become even richer, while everyone else gets poorer. And so we see that he has a heart of feldspar to go with his rubbery spine.

    I’m not concerned that he may become president, because he won’t. But he could become VP or a cabinet secretary, from which post he could inflict enormous damage to the Republic. That Minnesota Nice packaging conceals something quite dangerous on the inside, and I do hope a majority of voters learn to see through it. Those of us in Minnesota certainly have.

  10. Submitted by Jonathan Neil on 06/08/2011 - 04:38 pm.

    By keeping us poor they believe they can inspire us to fight ie make war. With that mentality, of course he wouldn’t mention defense baseline spending cuts.

  11. Submitted by Tony George on 06/08/2011 - 05:48 pm.

    Could you even imagine someone who makes less than a million dollars a year actually voting for Tim Pawlenty? That would be the way to bring your friends and neighbors down, and you wouldn’t have any Medicare or Social Security.

  12. Submitted by Tom Christensen on 06/08/2011 - 09:03 pm.

    Trickle-down Reaganomics, despite what Republicans say, was a complete abject failure. Reagan died a final and complete death in November 4, 2008. Even the Republicans have stopped saying, “in the tradition of Ronald Reagan”, because they too know he failed miserably. Pawlenty has a $6,000,000,000 necklace hanging around his neck so why would anyone go to him for fiscal advice. He couldn’t run Minnesota but some think he can run the country. That just doesn’t make any sense at all. The electorate needs to get out of the stupid zone, think before they vote or we will get continued gridlock. We can’t afford to be an all or nothing country. Compromise has to happen, as in teamwork, to repair our country and state.

  13. Submitted by Charles Senkler on 06/09/2011 - 08:42 am.

    Right on Tom Carlson, the grid locks killing us along with the partisan politics and political postureing.

    Consider a small business owner who’s liberal, young, free thinking marketing group comes up with a idea for a new product. Meetings are organized with the conservative, older manufacturing group and they can’t communicate so nothing happens. Worse case some one else develops the product and we loose market share and are worse off. The product might be a total bust or the next cell phone the point is we pay people to figure it out for us.
    If there are individuals in either camp that refuse to reason and negotiate with one another for the good of my small business I have to get rid of them. Not because they don’t know their job but because they don’t play well with others.

    When employees or politicans are concerned more with their personel agendas then with problem solving for the good of the company or the country, they have to go.

    In the long run the biggest and best help to American Politics would be term limits at all levels of elected government. The lobbyst simply couldn’t raise enough money to buy everybody every eight years, it would take the career out of career politican and for sure the talents out there.

  14. Submitted by Dennis Ringstad on 06/10/2011 - 08:59 pm.

    My Pawlenty plan paraphrase: The rich Kleptocrats need to be made richer and the serfdom needs to serve its masters.

  15. Submitted by Richard Schulze on 06/11/2011 - 08:57 pm.

    //The usual right-wingers like Larry Kudlow and the Wall Street Journal’s editorial page are falling all over themselves to praise Tim Pawlenty for his “plan” to double the real rate of economic growth from its historical level of about 2.5% per year to 5% for 10 years. I don’t want to waste much time on such an idiotic idea, if he could actually do this he deserves not only the presidency, but the Nobel Prize in economics. The truth is that there is no substance whatsoever to Pawlenty’s plan except to essentially abolish taxation for the wealthy. And doubling the growth rate is just childish wishful thinking. If there were any policies that could bring this about, every country everywhere would already be doing it.

    Two points I haven’t seen mentioned elsewhere: (1) According to the OECD, no county in its database has ever achieved 10 continuous years of +5% growth except Korea; a few had compounded growth rates above 5% annually for 10 year periods, but none have done so for many years and the U.S. has never done so in its history. (2) The U.S. has only once in its history gone 10 years without a recession — the George H.W. Bush/Bill Clinton expansion that ran exactly 10 years from March 1991 to March 2001; the average postwar expansion only lasted 5 years.//

    http://www.capitalgainsandgames.com/blog/bruce-bartlett/2266/pawlentys-wishful-thinking

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