Trickle down Economics (TDE) has been a popular economic theory for Republicans since the Laffer curve days of President Reagan in the early 1980s. It assumes that there should be no or few barriers to the accumulation of wealth, because if the rich do well benefits will trickle down to the rest of us. As the story goes lower taxes in terms of tax rates, estate taxes, capital gains on high income people will benefit everyone by increasing GDP growth, wages, and jobs. The claim of Reagan was that "all boats would rise" by giving huge tax cuts for the wealthy. This did not happen. The majority of boats stayed the same or sank, while only 5% of the boats actually rose.
The promotion of TDE has continued right up to the last election when candidate Paul Ryan offered a plan to cut taxes for the wealthiest Americans and at the same time cut expenditures for entitlement programs, education, health care, environmental programs, infrastructure, consumer protection and scientific research. Even though the recommended tax cuts will leave an enormous gap in revenues, he says they would pay for themselves by creating a huge, rapid spurt of economic growth of 5 to 10 percent.
During the Vice Presidential debate he said that “Republicans expect tax cuts to create somewhere between 7 and 12 million jobs, grow the tax and balance the budget.” If you take his plan literally you can assume that cutting taxes for the wealthiest people would actually increase tax revenue for the government. This same mysterious equation for growth was supposedly supported by Reagan’s Laffer curve, Bush’s dynamic scoring, and Ryan’s magical growth spurt. After 32 years where is the proof that TDE works?
Let me begin by referring to an obvious example. From 1945 to 1973 the country had phenomenal growth in GDP, wages, unions, and number of jobs. This period built the American middle class and created the notion of upward mobility. However taxes for the wealthy were 91% after the war, and 70% after President Kennedy. This seems to be a direct contradiction to TDE theory because during a period of very high tax rates for the wealthy the middle class grew in terms of wages, number of jobs and the gross domestic product grew.
But after 1973 things began to change. In July of 2011, an article in the Financial Times by Edward Luce noted that “the annual incomes of the bottom 90 percent of U.S. families have been essentially flat since 1973.” The data from the U.S. Census Bureau on the Median Household Income in the U.S. really tells the story of the middle class. The government adjusts the median household income for inflation, so they can compare each year. Starting in 1973 (the end of the post-war growth period), the median household income was $46,109. At the end of 2010, the median household income was $49,445 or a growth of $3,336 over 37 years. So income for the middle class has hardly budged, and consequently, the purchasing power to buy what the economy is able to produce is simply not there.
For years, I have been looking for an independent and quantitative study from a non-political group to prove TDE right or wrong. Finally in recent years quantitative studies have been showing up in the media. The Congressional Research Service is a nonpartisan entity associated with the Library of Congress that does academic quality research to answer difficult policy questions. The CRS released a study in 2012 that concluded that:
“The reduction in top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The report notes that tax rates were at the highest when growth was at its peak, and that the reduction in tax rates has not had any discernible impact on the types of investment that lead to growth.” Rather then acknowledge the findings the Congressional Republicans pressured the CRS to withdraw the report.
David Stockman who was President Reagan’s budget Director also confirmed that TDE was a sham. He was one of the architects of supply side economics who finally turned against the doctrine. To get the Reagan tax cuts passed they designed a policy that would give tiny tax cuts for most Americans and the big money was to go to the wealthy. Stockman said, “Giving small tax cuts across the board to all brackets was a “Trojan Horse” that was used to get approval for the huge top brackets cuts. Trickle Down was a term used by Republicans that meant giving tax cuts to the rich.”
Stockman goes on to say, “There is no realistic way for "Trickle-Down" economics to work and increase the income of the working classes of America. In fact I am certain that the developers of the theory of "Trickle-Down" economics were fully aware of this and that "Trickle-Down" has in fact worked as intended. This means that the intent behind implementing "Trickle-Down" was to benefit the wealthiest Americans at the expense of working class Americans. "Trickle-Down" hasn't failed, as many modern economists have suggested, it has succeeded in its goals, which is the increase of economic inequality and the shift of a greater portion of America's wealth into the hands of the wealthiest Americans. “2
I was always skeptical of supply side economics but I also wondered why this idea has pervaded our culture as an acceptable economic theory and had so much traction for many years. In his book “Idiot America” Charles P. Pierce offers 3 premises. First, any theory is valid if it moves units” that is gets intended results. Second, “Anything can be true if someone says it loudly enough” and I add also long enough. Third, “Fact is that which enough people believe. Truth is measured by how fervently they believe it.”
I think Charles Pierce’s 3 reasons pretty much tell the story of why so many voters accepted the notion of TDE for so long. In fact many Americans still believe in TDE doctrine as a matter of faith. Yes there is some truth to the concept. If companies or people make more profit then they are more likely to hire more workers but more jobs, higher wages, and more economic growth are not highly correlated with tax cuts as theorists insisted.
The issue of Federal Deficits
Another big issue that has been haunting our citizens since the Great Recession began is the fact of large federal deficits and who is most at fault for creating them. Currently there is a big argument in Congress about who is most to blame for the $14 trillion federal deficit.
I have always thought that conservatism was defined by balanced budgets and was against deficit spending. But evidence is mounting that both political parties accept deficits – they only disagree on how to spend the money.
During the Reagan administration they decided to have two major tax cuts but at the same time they drastically increased military spending which led to a $1.9 trillion federal deficit. When George W Bush came into office the country was in a recession with a growing deficit. Instead of balancing the budget as he had campaigned he presided over two more tax cuts and started two major wars which added $6.1 trillion to the deficit.
President Obama inherited the financial crash and subsequent Great Recession and has contributed $2.4 trillion to deficits through stimulus programs and loss of tax revenue. The following chart is an accurate assessment as to who contributed to Federal Deficits and who holds the debt.
The big lesson here is that there are no simple answers to complex economic problems. The simple idea that cutting taxes would lead to economic growth and eventually increase tax revenue was a simple answer that was accepted by many citizens for 33 years. The psychologist Paul Ginnetty calls this type of reasoning, “the potent narcotic of reassuring simplicity.”
This is also true of the federal deficit problems. It is much easier to play the blame game on who is most guilty in the creation of deficits then to examine all of the data and come up with a reasonable solution that benefits the majority. Politicians will always take advantage of our addiction to simplistic answers to their own benefit by simply telling people what they want to hear.
So what have we learned in the last 33 years? Have we learned enough about the narcotics of simplicity and to look deeper into the issues for the truth? The problems of big deficits, unemployment, and economic growth are upon us, and I like to think that we have learned enough to be skeptics and warrant more critical thinking. Do you think it is possible for the public to look deeper into these complex issues or will we always be at the mercy of the spin doctors and “the potential of reassuring simplicity”?