Tuesday, July 21, 2015

Finally, Democrats challenge trickle-down economics

A strong middle class is the source of America’s strength
David Madland

Nearly every day a new candidate announces his or her candidacy for the Republican presidential nomination, making it hard to keep track of all the primary contenders. But tracking their economic policies is a much simpler matter, because the basic proposition for the Republican candidates is the same as it has been for the past three decades: close adherence to trickle-down economics.

Some candidates may propose George W. Bush-style tax cuts that provide some modest relief for regular Americans but disproportionately benefit the rich, while other candidates would only reduce taxes for the rich. All support massive tax cuts for the 1% on the theory that doing so is good for the economy.

What makes the 2016 presidential election different is that Democrats are increasingly challenging this line of thinking. Because of a revolution in academic thought, progressive policy makers have begun to directly challenge the premise underlying trickle-down economics — that extreme levels of inequality are good for the economy.
As a result, the 2016 presidential election is shaping up to be one of those rare and especially important elections that is about ideas.

For years economists tended to think that inequality was helpful for economic growth, and thus provided cover for the trickle-down ideology. But increasingly, economists recognize that the decline of the American middle class has harmed our economy. Without a strong middle class, consumer demand is unstable and too dependent on debt, fewer people are able to develop their human capital, government becomes captured by the wealthy, and the social trust that makes transactions possible weakens.
A strong middle class is a source of America’s economic growth, and not merely the result of a strong economy, as was previously thought.

Economists have long known that inequality is high in the United States, but new data developed by economists like Thomas Piketty and Emmanuel Saez showed just how extreme inequality in the U.S. was compared to other wealthy countries. The data also showed that the share of the nation’s income the top 1% received equaled record levels in American history.

Another blow to trickle-down came from the actual growth rates of countries around the world. In the developing world, some relatively equal countries like South Korea grew much faster than more unequal countries like the Philippines. Similarly, even in the early 2000s, it was obvious that the U.S. economy had grown more slowly over recent decades that it had in the 1950s and 1960s when the country was more middle class.

It took the onset of the Great Recession to fundamentally change the way economists thought about inequality. To be sure, there isn’t a formulaic relationship between economic inequality and financial collapse as some have claimed, but the story of the Great Recession is closely related to economic inequality. High levels of debt for the middle class and inadequate financial regulation due to the wealth and political power of Wall Street clearly helped fuel our most recent economic downturn.

This growing body of academic research has deeply affected the way many progressive policy makers think about inequality and the economy. Not surprisingly, many leading Democrats— many of whom only danced around the edges previously — have now sharpened their critique of trickle-down economics. Arguments that tax cuts for the rich would reduce the amount of money available for education spending have given way to direct challenges to the theory of trickle-down.

Hillary Clinton notes that “as secretary of state I saw the way extreme inequality has corrupted other societies, hobbled growth and left entire generations alienated and unmoored.”

Similarly, other prominent candidates for the Democratic nomination for president voice similar concerns: Bernie Sanders says that income inequality is not only a moral problem but also “an economic issue,” and Martin O’Malley argues that “trickle-down economics has been an abject failure.” And Sen. Elizabeth Warren, who is not running for president but has still has significant influence, argues that the claim that “we have to choose economic growth or our families … is flatly wrong.”

As a result, we are poised for a debate about the true sources of economic growth that will have a long-lasting impact on economic policy making. While the candidates’ personalities, campaign strategies, blunders, and gaffes will undoubtedly be the focus of much news coverage, the real story of the election will be the growing challenge to trickle-down economics.


  1. I wonder today if people in their 20's even know what trickle down means. In the 80's, everybody knew what this term meant. Not sure today. Liberals have flat out lost this battle. They supported bad trade deals as surely as Republicans did, and there isn't much I've seen from them in support of unions other than taking campaign contributions.

    To me, the politics of it are meaningless because the talking points from left and right never change. Fact- there is an abundance of capital for investment. Fact- holders of said capital are still able to invest that capital in countries where labor rates and lack of regulation give them a fabulous ROI. Anecdote- less money in the hands of consumers means less growth. It would seem to be indisputable that this true, but to point out the fact that consumers have less money is to start a shit storm of "class warfare" "Quest for socialism" and on and on. We can and likely will continue to argue back and forth about regulation and taxes, but I think the bottom line is pretty straightforward, when the majority of people make less and less money, they spend less. I think China is starting to feel the effect of the average American making less money.

    1. When you trade middle class good paying jobs for cheap TV's etc, the results are obvious. People buy cheap not quality that costs more. Not American made that cost more.

      the bottom line is pretty straightforward, when the majority of people make less and less money, they spend less. 100% correct.

      The end result of the not so free trade agreements that both Dem's and Repub's are responsible for passing and signing.

      Paying more in taxes isn't the solution to the problem. Redistributing wealth from the top 10% isn't the answer. Both are nothing but a facade of fixing what the politicians broadcast to the minions. All the while ignoring the real problem, the evil, politicians who bring us more free trade agreements.

      Regulations, we can talk about that forever. The real solution, every regulation should have a 10 year sunset clause. If not working as advertised, kill it. Every regulation should be approved by congress if their is a cost to business, government for enacting the regulation. Why should unelected bureaucrats write enact laws for the country?

    2. Maybe I'm too cynical, but I think that approved by congress, in this case, would really mean approved by the lobbies which represent special interests. Many of our laws today are written by these special interest groups.

    3. Taking money from the top and just giving handfuls of cash to poor people is not an answer, and I've not seen anyone advocating for that. If you believe that an economy will suffer when the participants of that economy have less to spend, I'm not sure how anyone can really say that we don't need a redistribution of wealth in a manner that actually puts money into the economy. Again, taxing it and handing it right to poor people is not the answer. However, the fact remains that there is an abundance of wealth to be invested and those that hold wealth choose not to invest it in America. They blame taxes and regulation, but the reality is that they can continue to arbitrage third world labor and make far more money exploiting third world countries.

      I think that when things reach a ridiculous extreme, there is usually some snap back and those enjoying the extreme are the ones who suffer later. Look at American workers now. At one time, they enjoyed an unquestioned "right" to participate in the profit from their labor while the holders of capital took more risk and received less return than they enjoy AND payed way way higher taxes on what they did earn. Nothing lasts forever. There will always be those who bitch about unfair advantage of wealth (liberals) and there will be those who will perpetually gripe about taxes and government interference (conservatives). Both groups, when they have their advantage, will vastly overshoot a reasonable balance and set the stage for a bigger and more unpleasant correction. The rich arguably were punished for the Great Depression until Reagan set them free. We probably have another ten to fifteen years of this to endure until the old wealthy die off and their worthless heirs, who have never done an ounce of work, will be fleeced of their inheritance. Seems like one reasonable outcome to me.

    4. I'm not sure how anyone can really say that we don't need a redistribution of wealth in a manner that actually puts money into the economy.

      How would you like it if the government demanded you invest 20% of your money into the economy as it's only fair?

      So much for freedom for people to spend money as they want. Mommy government must be fed first and foremost.

    5. "So much for freedom for people to spend money as they want. Mommy government must be fed first and foremost."

      You are really missing my point Lou. If you want others to do well, by default, you are hoping there is a reconfiguration of who controls the wealth in the country. You can't simultaneously want the mythical middle class to do better while also not wanting anything to happen that threatens the absolute control that a very small slice of America has over everyone else. You are jumping to the conclusion I am not making.

    6. And you cannot have good paying manufacturing jobs as long as our government signs free trade agreements. The US cannot compete with cheap foreign labor and provide competitively priced goods. How can you demand wealthy people invest in the US, Business invest in the US when the government signs the trade agreements undermining US businesses. US Businesses, the wealthy are forced by government agreements, regulations, taxes to business elsewhere.

      Is that so difficult to see?

      We as a nation can no longer fix things from the top down and ignore the root of our problems. We have millions seeking work, forcing wage stagnation. We have foreign competition and more on the way with the next 2 agreements the government will shove down the throats of American. If foreign trade agreements why do we need to add money to the law to pay for retraining of displaced workers. Billions have been wasted training people displaced by foreign competition.

    7. Well, I get your point, it never changes. On the other hand, you aren't hearing what I am saying. If i simply state a fact that there is no shortage of money, you instantly jump to say I want the government to take away wealth and give it to the poor. Further, it is because of our taxes and regulations that those with capital are forced against their will to invest elsewhere and lastly, American workers are as much if not more to blame because they bought goods sold elsewhere. We agree on the effect of trade deals, and then come to starkly different conclusions.

      There is a big picture here that is pure capitalism. These trade deals are what capitalism is all about, IE opening the borders so that capital can be invested to bring the greatest return. You put the whole problem on the government for making the deals, and for subsequently having the highest tax rate in the world (a rate that no large corporation pays) and for our odious regulations. I mean, I guess that's fair enough, but here is a difference, the government is not seeking to destroy business, large multinationals, on the other hand, are seeking to consolidate as much power as possible to limit competition. To me, this is how real capitalism works. I'm not even saying it's evil, it just seems factual to me. I've said countless times that I believe solutions lie in forcing genuine competition. What you hear me saying, however, is that I want everything you are against. Doesn't make it true.

  2. Two interesting articles



    I thought the China article was kind of interesting in that he says we shouldn't put a higher rate on income tax, but instead put a high tax on luxury goods, as if, somehow, this mental masturbation makes it different. Still, there is a point here that is more in line with my view. It is a fact that massive wealth gaps and massive income gaps are ultimately destructive. He notes in there that due to unrest, Foxconn raised wages substantially. Employees didn't "earn" higher wages, they basically strong armed them.

    Seemingly, it is anticapitalist to point out that when there is too much concentration of wealth and power, bad things happen. There are plenty of things that could be done. Not saying the second article is the answer to everything, but we could use regulation to actually force competition rather than allow the winner take scenario we are playing under now. I would be in favor of lowering our corporate tax rate, but not when a corporation can be 99% domiciled in the actual United States and avoid paying taxes by paying for a mail box in the Cayman Islands. We had a tax holiday, and the money that returned promptly went into buying back stock or paying dividends. This shows me that taxes are less of a problem then pure greed. but, I guess as long as our corporate tax rate is where it is, the argument can be made that the stated (but not actually paid) tax rate is a big problem.

  3. The Guardian comments on trickle down economics: It's also a theory which has been widely discredited, both on a theoretical level and in practice. Because with the Laffer curve – perhaps unusually for economics – we have a historical instance of it being implemented by a direct proponent.

    Laffer was an associate of the Reagan administration, which had a staged cut in the marginal higher rate of personal income tax from 70% to 28%.

    The effect on the budget deficit was also striking. Reagan doubled it to $155 billion and tripled government debt to more than $2trillion. His successor, Bush senior, was forced to raise taxes as the deficit doubled again.

    1. Oh, the horrors.

      The Tax Equity and Fiscal Responsibility Act of 1982. According to a Treasury Department analysis, it raised taxes by close to one percent of GDP, equivalent to $150 billion per year today, and was probably the largest peacetime tax increase in American history.

      There were 11 major tax increases during his administration. And this doesn’t count the fact that Reagan intentionally delayed the start of tax indexing, which was part of the 1981 tax bill, until 1985 so as to capture a lot of anticipated bracket-creep for the Treasury.

      The Tax Reform Act of 1986, which was revenue-neutral in the long run, was a fairly substantial revenue-raiser its first year, increasing taxes by $18.6 billion or 0.41 percent of GDP.


      Tax Equity and Fiscal Responsibility Act
      57.3 Billion dollars

      Highway Revenue Act of 1982
      4.9 Billion dollars

      Social Security Amendments of 1983
      24.6 Billion dollars

      Railroad Retirement Revenue Act of 1983
      1.2 Billion dollars

      Deficit Reduction Act of 1984
      25.4 Billion dollars

      Consolidated Omnibus Budget Reconciliation Act of 1985
      2.9 Billion dollars

      Omnibus Budget Reconciliation Act of 1986
      2.4 Billion dollars

      Superfund Amendments and Reauthorization Act of 1986
      0.6 Billion dollars

      Continuing Resolution for 1987
      2.8 Billion dollars

      Omnibus Budget Reconciliation Act of 1987
      8.6 Billion dollars

      Continuing Resolution for 1988
      2.0 Billion dollars

      Total cumulative tax increase
      132.7 Billion dollars a year.

      The Reagan Tax increases since you conveniently forgot to mention them. You also forgot to mention with the tax increases, the Dem's were to cut spending which they refused to do.

      You also forgot to mention the slight increase of 8 trillion so far in additional debt that Obama signed up for and demanded. He also wants to end the only mechanism in place to cut spending less than the yearly increases in spending, the sequester which he suggested be put in place.

      How much more Keynesian economics do we need before his laughable theory is discredited? Another 10 trillion in debt perhaps?

    2. I did forget to mention that Bush 1 fell for the same fairy tale from the democrats, 2 dollars in spending cuts for every dollar in new revenue. Like the Reagan democrats, they also lied.

      Lies, seems to be the democrat way.

      To bad if you liked you healthcare plan.

    3. However, Bush I at least knew that Voodoo Economics were a crock. That fabled first year when tax revenues went up is what so many focus on. What isn't focused on is that in a very decisive manner, from that point forward, the middle class began it's descent into oblivion. Not all of that was Reagan's fault, of course because unlike today's Republicrats, he was actually a bit of a protectionist. Still, the concept of trickle down, which was what started this thread, has been a colossal failure. Lower taxes has NOT raised the tide of all boats and in the time period since Reagan, some of the best gains have come at a time of higher taxation. Higher taxes didn't bring prosperity, but conversely, there is not a shred of evidence that anything of value trickled down. Since Reagan, there has been a widening vortex of a very small slice of the country doing not just well, but disgustingly well while most everyone else has done decisively worse. We can go into as many sidebar chats of how shitty Obama is, and how democrats lie the most and so on, but the fact remains, what was promised with trickle down theory is also a gigantic lie.

    4. Max,

      It's interesting to see jobs exported and the import of cheap goods. Compare that to the decline of the middle class.

      It's far more than trickle down, the transition to the global economy has killed the middle class far more than trickle down. The joke about trickle down is 10% of the taxpayers pay 70% of all Federal Income taxes. When Kennedy cut taxes the benefits were enormous as few were exempt from paying taxes. Say what you will, today, 45% of the country pay nothing so cutting taxes had zero impact on their ability to consume. Hence the administrations effort to cut payroll taxes which did benefit all workers. We have reached the point with our current progressive tax system that cutting taxes has little effect as so many are exempt.

      You can talk all you want about creating middle class jobs however the new middle class pay of 15-20 bucks an hour doesn't compare to the middle class jobs of 30 years ago. Yes we have foreign auto manufacturers producing autos in the south for the new wages. To add fuel to the fire, there are 2 ways to have higher wages.
      1. Legislate it which is no solution.
      2. Supply and demand. Reduce the number of workers as there are a fixed number of jobs which goes up and down. Imagine what the pay would be if we deported illegals and only allowed people in to work with a seasonal work permit. Until we get a handle on our workforce/labor market expect the income disparity to continue and possibly get worse with more people migrating to the US every day.

    5. 10% may pay 70% of the taxes, but they also earn 90% of the income. The people who pay no taxes are in that spot in part because our economy has crushed wages so sharply, they don't earn enough to pay income tax. In my opinion, this is a macro issue and we've seen two extremes. Ultra high taxes on the wealthy, but in an environment where the middle class also had good earnings and paid taxes. Now, rates for the wealthy are historically low and though they pay most of the taxes, they also earn a share of all the income that is disproportionate to previous historical times. This is hard to prove, but I feel like the lowering of taxes to the rates that we have has encouraged a "hoarding" effect. Would wages stay so low on the working class if taxes on the wealthy were higher? I wonder as a matter of curiostiy

    6. Depends on who you believe.

      The top 10 percent of income earners paid 68 percent of all federal income taxes in 2011 (the latest year available), though they earned 45 percent of all income.

      Historically low,
      Max I believe you swallowed the rhetoric hook, line and sinker. Is the state income taxes paid in California, NT at historically low also or don't they count? Do the ACA taxes paid by the wealthy count or are they just another inconvenient truth?