Trickle-Down Economics: The 4th Conservative Failure

By the time David Stockman, Reagan’s budget czar, had become disillusioned with supply-side, “trickle-down” economics, the damage had already been done.

The magnitude of the fiscal wreckage and the severity of the economic dangers that resulted are too great to permit such an easy verdict. In the larger scheme of democratic fact and economic reality there lies a harsher judgment. In fact, it was the basic assumptions and fiscal architecture of the Reagan Revolution itself which first introduced the folly that now envelops our economic governance.

The Reagan Revolution was radical, imprudent, and arrogant. It defied the settled consensus of professional politicians and economists on its two central assumptions. It mistakenly presumed that a handful of ideologue were right and all the politicians were wrong about what the American people wanted from government.

File that under “No shit, Sherlock”. I could have told them that. In fact, I did. Anybody could have told them that who wasn’t blinded by the prospect of a trough of money they didn’t have to share with, say, their employees.

Trickle-down was a disaster for everyone in the country except the top 10% of “earners”, seeing as how they made damn sure “trickle” was the operative word. Although the 80’s were a productive and highly profitable time for Wall Street, the rest of us were struggling just to get by. The “trickle” was just that: a mean, tiny drip of the money-pot like a leak in your roof so small you might not notice it for years. The pool stayed at the top, so deep you could have set up a diving board.

The economy – for us ordinary folk, anyway – went so far into the tank after Reagan that Bush I lost his re-election bid due to so many people being out of work and him being so happy about it. They didn’t take kindly to his transparent joy in their financial misery. They threw him out and brought in a Democrat to clean up the mess because Poppy was so “out of touch” (the kindest possible interpretation they could have put on the way he protected the investor class at the expense of the rest of the country).

You’d think conservatives would have learned from all that but apparently not. With George II in the saddle, they brought it all back again and with the same empty promises accompanying it that they made the first time. And once again, it hasn’t worked (except, this time, for the top 1% of earners).

Why has it failed? Because, as Robert Frank explained in yesterday’s NYT, all its assumptions are wrong.

The surface plausibility of trickle-down theory owes much to the fact that it appears to follow from the time-honored belief that people respond to incentives. Because higher taxes on top earners reduce the reward for effort, it seems reasonable that they would induce people to work less, as trickle-down theorists claim. As every economics textbook makes clear, however, a decline in after-tax wages also exerts a second, opposing effect. By making people feel poorer, it provides them with an incentive to recoup their income loss by working harder than before. Economic theory says nothing about which of these offsetting effects may dominate.

If economic theory is unkind to trickle-down proponents, the lessons of experience are downright brutal. If lower real wages induce people to work shorter hours, then the opposite should be true when real wages increase. According to trickle-down theory, then, the cumulative effect of the last century’s sharp rise in real wages should have been a significant increase in hours worked. In fact, however, the workweek is much shorter now than in 1900.

Trickle-down theory also predicts shorter workweeks in countries with lower real after-tax pay rates. Yet here, too, the numbers tell a different story. For example, even though chief executives in Japan earn less than one-fifth what their American counterparts do and face substantially higher marginal tax rates, Japanese executives do not log shorter hours.

Trickle-down theory also predicts a positive correlation between inequality and economic growth, the idea being that income disparities strengthen motivation to get ahead. Yet when researchers track the data within individual countries over time, they find a negative correlation. In the decades immediately after World War II, for example, income inequality was low by historical standards, yet growth rates in most industrial countries were extremely high. In contrast, growth rates have been only about half as large in the years since 1973, a period in which inequality has been steadily rising.

The same pattern has been observed in cross-national data. For example, using data from the World Bank and the Organization for Economic Co-operation and Development for a sample of 65 industrial nations, the economists Alberto Alesina and Dani Rodrick found lower growth rates in countries where higher shares of national income went to the top 5 percent and the top 20 percent of earners. In contrast, larger shares for poor and middle-income groups were associated with higher growth rates. Again and again, the observed pattern is the opposite of the one predicted by trickle-down theory.

The trickle-down theorist’s view of the world is nicely captured by a Donald Reilly cartoon depicting two well-fed executives nursing cocktails on a summer afternoon as they lounge on flotation devices in a pool. Pointing to himself, one says angrily to the other, “If those soak-the-rich birds get their way, I can tell you here’s one coolie who’ll stop” working so hard.

This portrait bears little resemblance to reality. In the 1950s, American executives earned far lower salaries and faced substantially higher marginal tax rates than they do today. Yet most of them competed energetically for higher rungs on the corporate ladder. The claim that slightly higher tax rates would cause today’s executives to abandon that quest is simply not credible.

In other words, the major rationales for trickle-down – all of them – have proved to be a crock, not just here but across the planet. It’s all what my mother used to call “moonshine” – it looks pretty but there’s no substance to it.

It’s way past time to call this what it is: a deliberate scam to justify the investor class’ wholesale looting of our national resources while dodging any responsibility to the community or even their own employees. Like oligarchs everywhere and in all ages, the leaders of the US corporatocracy want it all. Trickle-down is nothing but the patter a snake-oil salesman uses to fleece the suckers. It was never intended to work the way they claimed it would, that was misdirection and manipulation. It was intended to do exactly what it did both times: put as much money as possible in the hands of the oligarchs and as little as possible in everyone else’s. In that sense and in that sense only, it was a huge success.

But the embezzlement of the public weal has a price.

Low- and middle-income families are not the only ones who have been harmed by our inability to provide valued public services. For example, rich and poor alike would benefit from an expansion of the Energy Department’s program to secure stockpiles of nuclear materials that remain poorly guarded in the former Soviet Union. Instead, the Bush administration has cut this program, even as terrorists actively seek to acquire nuclear weaponry.

The rich are where the money is. Many top earners would willingly pay higher taxes for public services that promise high value. Yet trickle-down theory, which is supported neither by theory nor evidence, continues to stand in the way. This theory is ripe for abandonment.

This, too, was deliberate, this sucking-up of the funds that were supposed to be going to improve life for the American public by private interests unconcerned about the deleterious effect on the very taxpayers who provided the money. Remember The Toad’s famous “bathtub” remark? Trickle-down was about shifting the wealth to the top and the responsibility for paying to the bottom.

There’s a famous scene in the 1987 movie Wall Street in which Gordon Gekko, the corporate predator played by Michael Douglas, tells a meeting of stunned shareholders that greed is good, that the unbridled pursuit of individual wealth serves the interests of the company and the nation. In the movie, Gekko gets his comeuppance; in real life, the Gordon Gekkos took over both corporate America and, eventually, our political system.

Oliver Stone didn’t conjure Gekko’s “greed” line out of thin air. It was based on a real speech given by corporate raider Ivan Boesky — and it reflected what many corporate executives, conservative intellectuals and right-wing politicians were saying at the time.

It’s no coincidence that ringing endorsements of greed began to be heard at the same time that the actual incomes of America’s rich began to soar. In part, the new pro-greed ideology was a way of rationalizing what was already happening. But it was also, to an important extent, a cause of the phenomenon. In the past thirty years, right-wing foundations have devoted enormous resources to promoting this agenda, building a far-reaching network of think tanks, media outlets and conservative scholars to legitimize higher levels of inequality. “On average, corporate America pays its most important leaders like bureaucrats,” the Harvard Business Review lamented in 1990, calling for higher pay for top executives. “Is it any wonder then that so many CEOs act like bureaucrats?”

(emphasis added)

Yes, boys and girls, trickle-down was the result of a right-wing conspiracy whether you like the word or not. They developed it and sold it to us like any other product. AEI, Heritage, Hoover – that’s where it was born and that’s where it was spread from, the whole thing paid for by people like Joe Coors, Richard Mellon Scaife, ExxonMobile, Chevron, and John Malone. It was a classic case of the rich using their money to make sure they got richer, and it worked. We bought it.

OK. Lesson learned. Can we dump trickle-down now? For good?

(NYT link via Norwegianity)