Trickle Down...R.I.P.
Look for this obituary in tomorrow's paper:
Trickle-down economics died yesterday morning at 10AM. The cause of death was a data release from the US Census Bureau, but trickle-down had been ailing from lack of empirical support for decades. Also known as "supply-side economics," trickle-down was the love child of Ronald Reagan, Arthur Laffer, and Jude Wanniski. It is survived by Larry Kudlow and Co., and the editorial page of the Wall St. Journal.
That's what you should see, but you probably won't. Let me explain.
The Census Bureau released some new data on Tuesday that strongly contradicts supply-side, trickle-down economics, but the truth is that if this brand of hucksterism could be brought down by evidence, it would have died long ago.
First, the new data. Every year the Census Bureau releases info on middle-class incomes and poverty for the prior year. So today's release refers to last year's data. Median household income, inflation-adjusted, was up slightly in 2007, but poverty rose too.
But the annual data are not of great interest here. Since 2007 was the last year of an economic expansion that began in 2001, that makes it an economic peak: the last year of a cycle. Which means we can now, for the first time, compare the results from this peak to the peak of the prior cycle: 2000.
Economists like such comparisons because they evaluate a given outcome across similar years in the cycle. If you were to compare, say, trough to peak, you'd expect things to improve. But peak-to-peak is considered the legit way to compare like-to-like.
So here are some key peak-to-peak comparisons:
Real (inflation-adjusted) median household income was essentially unchanged between 2000 and 2007 (it was $300 lower last year than in 2000, but the difference is not statistically significant).
This is the first cycle on record where the real median household income failed to surpass its prior peak.
For working-age households, real median income is $2,000 below its 2000 level.
Poverty rates were 1.2% higher in 2007 than in 2000, up from 11.3% to 12.5%, an addition of 5.7 million to the poverty rolls. This is the worst cycle for poverty on record. The second worse was 1979-89, a decade also dominated by trickle-down economics.
What is trickle-down? It's the set of economic policies based on the notion that if you provide economic incentives to the wealthy by cutting their taxes (or, as the supply-siders put it, "letting us keep our money") while deregulating industry, you'll unleash a tsunami of economic activities that will enrich even the least advantaged among us.
The theory doesn't make sense even on its face. Why would people work harder only if you cut their taxes? After all, their after-tax income goes up, so they might decide they can work less and still be as well off. Or, if you raise their taxes, they might decide to work harder to make up the after-tax losses.
No matter...this stuff is not based on logic. It's largely a rationale for upward redistribution that's been kept alive by the vested interests who benefit from it. Reagan put this stuff on the map, but GW Bush brought it back with a vengeance, and McCain goes even further. He extends the supply-side Bush tax cuts, and lards on about $75 billion more in corporate tax cuts on top of that.
The evidence from the 1980s and the 2000s shows that trickle-down works fine, if by "down" they mean "up." But is there any counter-evidence that shows the impact of a different policy regime on middle-class and low-incomes?
Exhibit A is the 1990s. When he came into office, Clinton eschewed supply-side, cutting taxes on lower-income households and raising them at the top end. Obama takes a similar approach.
Now, take a look at Figures 5 and 6, and especially Table 2 in this document, drawing on today's report from the Census. There you will see evidence of the strong real growth in median incomes and sharp declines in poverty that occurred over the 1990s, contrasted with the opposite trends in the 2000s.
Remember those working-age households that lost a couple of grand in the 2000s? Their income was up 10%, or $5,200 in the 1990s (1989-2000). Had this growth rate prevailed in the 2000s, their median income would have gone up $3,600 instead of falling $2,000.
Note that these results are strongest for minorities. The median household income of African-American households grew 22% in the 1990s and fell 5% in the 2000s. Note also the poverty results from black children (Table 2 from the above link). If evidence were bullets, trickle-down would perish in a pool of blood.
Yet, its obit is premature. It lives on in the Republican platform, the right-wing think tanks, and conservative media (really, in the mainstream media...you may recall that during a Democratic primary debate on ABC, Charles Gibson claimed that due to the magic of supply-side, capital gains tax cuts pay for themselves).
Frankly, I'm not sure how to kill it, and am earnestly interested in any ideas you might have for exposing and discrediting this deeply damaging ruse. In the meantime, the best we can hope for is to throw its practitioners out of the White House and Congress.
I am mystified that anyone who is reasonably intelligent and not excessively wealthy could ever have bought the supply-side economics theory. I hope that during this campaign season specific focus will be given to such statistics and the foolishness of that theory and how McCain buys it lock stock and barrel. It's an excellent way to get into more detail regarding economics and go hard on McCain at the same time.
August 27, 2008 12:14 AM | Reply | Permalink
Bademus,
don't you understand that 200 million Americans are now in the market??? And that they receive capital gains and dividends?????
I bought 2 shares of Halliburton last year and received dividends, and when I sell them I will receive capital gains, just like Dick Cheney with his Halliburton stock!
August 27, 2008 2:40 PM | Reply | Permalink
zombie economic theory. no facts, no data, needed. only a copy of Ayn Rand's collected works.
August 27, 2008 12:17 AM | Reply | Permalink
Ha! Awsome comment!
August 27, 2008 12:25 AM | Reply | Permalink
Trickle-down, voodoo, supply-side, whatever, economics will go away when it's believers do.
There's a whole American generation that pinned their economic woes on a nebulous but nefarious notion of "government" and "regulation." This economic theory allows people to blame someone else for bad times, and in good times applaud themselves. It's narcissism under a facade of economic theory. It's what lots of people want.
So yeah, I'm not holding my breath. It's very tempting to believe that everything that goes wrong is someone else's fault ("Recession? Too much government!"), and that every good thing is borne of the self ("Economic growth? I'm my self determination!").
Simply put, supply-side economics isn't about economics at all. It simply makes people feel good, and as such, people will continue believing in it.
August 27, 2008 12:34 AM | Reply | Permalink
...should read:
August 27, 2008 12:45 AM | Reply | Permalink
thanks for this article!
August 27, 2008 1:18 AM | Reply | Permalink
Don't trickle down on me and tell me it's raining
August 27, 2008 1:24 AM | Reply | Permalink
Economists like such comparisons because they evaluate a given outcome across similar years in the cycle.. Jared Bernstein
This sentence is at the heart of Jared's argument, but the visually apparent "like-to-like" equivalences must always be qualified by the phrase ceteris paribus -- that is, all variables being made equivalent except the one being "evaluate(d)."
Economists know (as do we all) that many "outcomes" are different from one period to another, but they do not know what caused those differences, because they do not have the tools necessary to "make all things the same."
Economists are only advocates who marshal such facts as seem to them to support their favored policies and disregard those that appear not to.
August 27, 2008 2:25 AM | Reply | Permalink
...but they do not know what caused those differences...they... are only advocates who... disregard those that appear not to...
And your point is?
With or without evidence of causation, the presence of *economic conditions declared mutually exclusive by the purveyors of Fat Freddy Hayek's Government Bustout Bushwah at least undermines the intellectual pretensions of the said school of hollowed out polity.
*eg, the cited Clinton era growth and the Clinton tax policies. Whether the latter caused the former is irrelevant to rebutting the accuracy of the hysterical claims that they would, upon enactment, prevent the same.
August 27, 2008 2:56 AM | Reply | Permalink
My assertion was directed at all economists (right and left).
Neither the proponents nor the opponents of the 1990 and 1993 tax policies can show the effects of those enactments.
Note: the fact that the opponents of Clinton's 1993 tax policy (which, by the way, may well have cost us the House in 1994 and which Clinton later backed away from) were wrong to claim that it would prove to be an economic disaster doesn't prove that raising taxes caused the economic good times. Indeed, for all we and our economist friends know raising taxes may have limited the extent of the economic recovery which was caused by altogether different facts and circumstances having nothing whatever to do with tax/fiscal policy.
August 27, 2008 12:55 PM | Reply | Permalink
Do I understand your comments correctly: since we can never hold constant all variables save one we can never know (with certainty) the true effect of changing the one varying variable? So since we do not know with certainty, we do not know. Certainly such demands for rigor will devalue (all?) studies in everything but logic and math.
August 27, 2008 2:50 PM | Reply | Permalink
Not so.
We're not talking a dogmatic Vicianism*, here. Physicists, par exemple, have the tools (quantum mechanics probability); economists have simplistic charts and cartoons.
* “To introduce geometrical method [back then it was Cartesianism] into practical life is ‘like trying to go mad with the rules of reason’."
August 27, 2008 3:45 PM | Reply | Permalink
Even physicists can't hold constant all the variables except the test variable. They have to rely on assumptions -- theories-- about what variables are relevant. Economists are entitled to do the same.
August 28, 2008 5:10 PM | Reply | Permalink
They don't have to. They can rely upon experiments to prove their forecasts.
But since economists, when searching for the effects of policy, can only compare past data, they're obligated to reduce those data to equivalences -- you know, apples and oranges.
August 29, 2008 1:51 AM | Reply | Permalink
Ya but we're really richer now, because we all have iPods, or something.
August 27, 2008 4:22 AM | Reply | Permalink
The myth will only die when the super wealthy who pay for its continuance cease funding the think tanks and academic departments that promote it.
The continuing nonsense that emerges from Cato, Hoover, Heritage, Chicago and the rest of the group is funded by Scaife, Koch and the rest of the gang. They still have some unfulfilled objectives and aren't about to give up the fight.
Principal among them are a permanent repeal of the estate tax as well as preferential treatments of the type of income they receive (capital gains, dividends, sheltered off-shore earnings, etc.)
The economic policy in this country is, effectively, being run for the benefit of a few hundred people - the top tenth of one percent.
One can wield a lot of influence when one's personal fortune is $18 billion (two Koch brothers, four Waltons).
Nothing on the horizon is visible to change this dynamic. A bit of fiddling with the estate tax and payroll taxes won't make a dent.
What is needed is a generation long effort, similar to that in the UK which got rid of the landed gentry, to eliminate huge accumulations of inherited wealth. There is no political will to do this.
August 27, 2008 9:33 AM | Reply | Permalink
Oh I don't know, seems to me such myths will never end until they stop teaching the American Revolution in public schools. Lots of people simply don't like big far-off governments and will always look for arguments to further prove that it's a bad idea to send money to them. They don't need think tanks to convince them. Like you get angry about "landed gentry," they get angry about "eminent domain."
August 27, 2008 1:10 PM | Reply | Permalink
Professor Bernstein overlooks the real effects of lower taxes on incentivizing marginal output.
Trickle down was never a legitimate economic theory in anyone's mind apart from those in Prof. Bernstein's post. But there is enough of a grain of substance there to make it serve as an effective rationale for all sorts of economic mischief.
August 27, 2008 10:19 AM | Reply | Permalink
I'm disappointed that the writer will not acknowledge (to my reading at least, and please correct me if I'm wrong...) the fact that the upper income bracket and the wealthiest DO in fact create jobs and reinvest, at least when they are not shipping jobs overseas or fighting regulation of any kind (but that's at least two other debates...).
August 27, 2008 11:49 AM | Reply | Permalink
Fixed that for you - my edit in italics.
August 27, 2008 12:16 PM | Reply | Permalink
Thank you.
Among all the other stories that swirl around in the election cycle this is probably the most important and least covered. By any measure supply side economics is a failed theory, one which has cost the US nearly 5 trillion dollars in debt to prove wrong. McCain still says that we need tax cuts to promote new economic expansion even though it has not worked in the last 8 years. The cost of these policies over the last 8 years is 250 billion in interest payments every year, that is roughly the carrying cost of 5 trillion in debt. This is truely wasted money, that 250 billion does not go to infrastructure or back into the US economy in any way.
Why would you look for advice on economic policy from wall street and cnbc. Thats like asking a group of 18 year olds to write drug and alcohol policy. Wall street will always look for fewer rules, less oversight, and easy access to money. The only help they want from the government is bailouts.
August 27, 2008 12:36 PM | Reply | Permalink
How do you know that absent the Bush tax cuts the weak economic expansion we've experienced over the past eight years wouldn't have been even less robust?
August 27, 2008 1:00 PM | Reply | Permalink
Well Ellen,
An interesting take. Ignore the real damage done to the economy and speculate it could have been worse without the actions that precipitated such damage.
August 27, 2008 3:44 PM | Reply | Permalink
What damage?
And please respond with the respect to the issue Jared is discussing -- namely, the Bush tax cuts.
We can discuss the deleterious effects of the Bush anti-regulation regime and the disastrous effects of Clinton's reappointment of Greenspan in a thread dedicated to those issues.
August 27, 2008 3:55 PM | Reply | Permalink
Sure, the Bush tax cuts, Especially the capital gains cut from 28% to 15% has widened the divide between the ultra rich and the rest of us. That in itself is not damage, but certainly not something to be proud of. The real damage comes from the 8 years of deficit spending that was caused by the tax cuts. That lost revenue was never made up by spending cuts, nor was it realistic to think it might have been possible to do so without 2 wars and terroroist attacks. The budget shortfall is projected at 500 billion before factoring in another 100 billion for war spending. 600 billion dollars, or roughly $2,000 owed by every man woman and child in this country. In 8 years these tax cuts have caused a doubleing of our national debt from 5 trillion to nearly 10 trillion dollars. The annual carrying cost for that is roughly 500 billion dollars factored into the budget that is wasted. For perspective, the budget for the entire department of defense is 600 billion dollars a year.
The US is close to economic collapse due to irresponsible tax policy. We can no longer sell enough bonds to cover the shorfall so money is printed, or more commonly loaned to commercial banks from assets the treasury does not have. This has caused a skyrocketing inflationary price spike as well as the devaluation of the US dollar, thereby wiping out a good percentage of peoples savings.
That is my perspective, now please tell me how the tax cuts have helped our economy.
August 27, 2008 6:00 PM | Reply | Permalink
The phrase "helped our economy" is argumentative (or perhaps, just meaningless).
If by that phrase you mean to answer the question of whether our economy grew after something occurred, then, the tax cuts "helped our economy" by stimulating consumption and money velocity which led to a growth in GDP.
August 27, 2008 6:20 PM | Reply | Permalink
So are just here to be contrarian, or do you have something to contribute?
August 27, 2008 6:58 PM | Reply | Permalink
Let me see if I can "contribute," RE, by straightening out your unsophisticated view of the federal debt and what part it plays in the economy.
To begin with you should notice that approximately 44% of the federal debt is held by the government and a like percentage of the interest on that debt is, therefore, a bookkeeping entry, only. Further, a government debt of $5 trillion is hardly likely to cause an "economic collapse" in a $14+ trillion economy.
You should also notice that while the portion of the federal debt not owed to itself has grown by about 2/3 over the past eight years to $5+ trillion, the household debt of Americans has doubled to over $14 trillion over those same years (business debt is up almost 50% to $10+ trillion).
This increase in debt -- both public and private -- is necessitated by the negative balance of trade the United States runs. It's an accounting identity. The money we pay out to foreigners must come back and it will come back primarily in the form of loans to Americans and their government who, together, must run a deficit. How much deeper in debt do you want American households to go?
Your hysterical debt rant makes you sound like Pete Peterson, the "Crusader in Clover", whose principal worry is that his estate may wind up having to pay off the SSTF bonds.
August 28, 2008 3:59 AM | Reply | Permalink
Well, actually trickle-down died (or should have died) in 1929.
August 27, 2008 1:02 PM | Reply | Permalink
Only to make its reappearance with JFK's tax cuts which opponents argued unduly benefited the wealthy and were based on trickle-down economics theory to which claim, he famously answered, "A rising tide lifts all boats."
August 27, 2008 1:40 PM | Reply | Permalink
Ellen,
A rising tide may have lifted all boats then, but I'm not so sure that applies roday. A rising tide today seems to rise the boys in the corporate board rooms compensation packages with peanuts trickling down to the average taxpayer.
August 27, 2008 3:12 PM | Reply | Permalink
It does seem like a rising tide would lift all boats, but in order for that to be true, shouldn't the tide be rising in all the ports, not just the oil company ports?
And, if across time and Presidents, as well as the Congress factor, history shows a rise in wealth and wealth equality distribution under some form of Democratic rule, then economists do have a basis for their pronouncements, don't they?
August 27, 2008 9:00 PM | Reply | Permalink
It seems to me that if it's "history" -- what happened, not why it happened -- we're looking to for explanations, then, it's historians and not economists we should be relying upon.
August 27, 2008 9:12 PM | Reply | Permalink
The 90s showed that a rising tide still lifts all boats, which only makes sense. The problem with the current decade is that there hasn't been a rising tide for anyone. The Bush economy has been bad even for the wealthy, who have seen their investments tank and their net worth decline. Someone did a study a while back which showed that the only area of the country which had seen substantial income gains of late were the DC suburbs-- meaning that only people who are positioned to consume directly from the GOP-provided government dole to the rich have benefited from this economy. People who make money out in the real economy have seen profits dwindle and assets melt away like snow in spring.
August 28, 2008 3:19 PM | Reply | Permalink
The richest landed gentry who claim to be conservative have a special platform that they have been very successful with in the U.S. - They have a government that directly assists them in gaining more wealth at the expense of the working class, but they appease the least educated population by having a government that plays a minimal roll in protecting civil rights and providing civil services for the sake of individual "independence" and financial "responsibility".
So, the key to making the least educated aware that having a leader who saves the rights of fetuses and keeps us from seeing the horror of citizens with alternative sexual identities getting married also makes our children have one of the worst educations in the "Free World" in order to provide more wealth for the richest is to make popular media communicate this message. How do we do this? Get the bloggers out on the street, on the nightly news, and finding any ways possible to get the word out to the uneducated who don't read what we do.
August 27, 2008 2:31 PM | Reply | Permalink
Jared,
here's what I don't understand.
Supply side economics says, in part, cut the taxes on the rich so they can invest and create jobs and get the economy moving again. (yawn)
1- Dick Cheney obviously has millions in stock, bonds and cash. If he wants to invest, especially in new ventures, why doesn't he simply sell some stock or bonds and raise the investment money that way? Why does he need a tax cut to invest?
2- These tax cut bills to create jobs never have a paragraph that says;
"This tax cut must be used to creat net jobs in the USA; if the taxpayer cannot document the hiring of American workers within one year of paying the lower rate, he will pay back the tax cut with interest."
August 27, 2008 3:25 PM | Reply | Permalink
JohnW1141,
1) I dunno...the whole thing smells to me. But I guess Darth, I mean Dick, would say because he has to pay X% on the realized gain from a stock sale, he won't do it. But if could pay less than X%...well, then he'd be selling and investing like crazy.
2) True...they never have that paragraph.
August 27, 2008 6:11 PM | Reply | Permalink
Jared,
its snake oil being sold to the denizens of Dogpatch, USA.
August 27, 2008 6:35 PM | Reply | Permalink
Jared,
Why does your analysis of wages exclude benefits? Haven't benefits risen in cost faster than inflation? Aren't benefits comprising an increasing share of a worker's total compensation?
September 1, 2008 9:29 AM | Reply | Permalink
Ellen's definitional and measurment quibbles aside, can we just point out that the DOW has been up a bit but is now back to where it started in 2000?
August 27, 2008 6:35 PM | Reply | Permalink
Is it your view that at the start of 2000 the DOW was where it should have been?
Starting point bias, perhaps?
Note: In my view a non-bubble DOW would and should have been no higher than 7250 at the beginning of 2000. And while I think the DOW too high today, its advance from 7250, given the growth in the economy and in corporate earnings over the past eight plus years, is reasonable.
August 27, 2008 8:01 PM | Reply | Permalink
Ellen's canard about the Kennedy tax cuts are used by conservative regularly. Have any of these people heard his (kennedy's) speech when he introduced the?
Kennedy explained that the wealthy did not pay those tax rates because of loop holes. What he did was to lower the tax rates and close the loopholes. Kennedy indeed increased the tax revenues from these same bracketed people.
McCain uses this same ruse when he says we have the highest corporate tax rate and that we need to lower their tax! Over half of the largest profitable corporations pay NO or nominal taxes (less than 5%). The real tax rate on corporations is about 14% with higher rate for SMALLER corporations and less for larger.
August 27, 2008 6:50 PM | Reply | Permalink
The real "canard" is the claim that the few tax loopholes Kennedy closed -- as a sop to Labor to get them onboard with his trickle-down tax cuts -- were responsible for the growth in tax revenues rather than the real reason -- that is, an increasingly efficient economy.
August 27, 2008 8:16 PM | Reply | Permalink
Land O' Goshen. I travel for a day and economic idiocy breaks out. If trickle down isn't the way things work, then is it trickle up? Of course not. Poor people do not create jobs or pay income taxes.
They certainly don't have money laying around to put in banks for people that want to borrow for building businesses.
Like it or not, rich people drive the economy. Why? Because rich people get rich by offering something of value. Something people want to trade their dollars for.
Granted, it would seem to some that bumping up the upper brackets 5% isn't going to break the bank. But that's not how rich people think. Since most of their money from savings and investment are taxed at the highest rate, let's assume 39.6%, plus say 8% state, they aren't thinking 5% they're thinking nearly 47% total. Out of every dollar they make at the margin they get to keep only 53 cents.
That's when they think of off shore accounts, and muni bonds. Especially muni bonds.
Now on to the original points. 2001-2007 heralds the rise of wage competition from the other Americas and Asia. It's a miracle that incomes held steady.
I also presume that the poverty stats include the influx of illegals? I'd say the rest of the world is beating us like a rented mule, and we're doing well to maintain equilibrium.
Also, let's not forget the Clinton surpluses were immediately preceded by a large cut in cap gains taxes, resulting in substantially MORE revenue, not less. Enough apparently to put the deficit to rest for a time. Supply side is about revenue, spending is a whole different matter.
In the end though, it's the Walmart way that's the more profitable. They charge less and make it up in volume. Mr. Bernstein prefers the Tiffany method - charge more for fewer transactions. Which company do you think makes more profit(taxes) and provides more jobs? Look it up.
August 27, 2008 9:05 PM | Reply | Permalink
shooter42 says:
shooter, you made this claim before, which insinuates that the cap gains tax was responsible for surpluses, and I showed that the Clinton deficit reduction which led to the surpluses started well before the cap gains tax, and the budget balanced in 1999. Here's another chart which shows the increasing revenues started well before the 1997 cap gains tax cut.
Check the first graph and the first two paragraphs.
http://zzpat.tripod.com/graphs.htm
August 28, 2008 10:16 AM | Reply | Permalink
Too bad this guy didn't include Clinton's last year in office or any of Bush's term. In any event, considering that Clinton cut the rate by nearly 30%, by your reasoning receipts should have tanked by the same amount. But it didn't. Instead they increased, by 25% from 1997 to 1998. How did that happen?
I'll be happy to grant that Reagan's cuts didn't do as much as billed, but then he had to engineer a recession to kill inflation and had a Dem Congress. Context is more important than individual policies.
As I mention to the "Brain" the market tanked and we went into recession before Bush could get the tax cuts implemented. How did that happen?
PS. Sites that headline Impeach Bush are hardly neutral and one has to worry about massaged data. Like not including Clinton's last year in office.
August 28, 2008 10:57 AM | Reply | Permalink
shooter42 says:
Shooter, you can't be referring to my site as it shows CLinton's last year in office.
Reagan "engineered" a recession?
Reagan had a Republican Senate the first 6 years of his Presidency, you didn't know that?
Again, if you refer to the site I posted there is no "Impeach Bush headline".
And as I claimed above, Clinton's last year in office IS shown, all 8 years are accounted for.
August 28, 2008 11:34 AM | Reply | Permalink
Sorry, "impeach Bush" is a link at the top, rather than a proper 20pt. headline, but it's close enough. As for the graphs, Clintons last year was Jan 2000-Jan 2001. I don't see that in there. The last date is Jan 1999 - Jan 2000. One year short.
Yes, Reagan engineered a recession via Paul Volker raising interest rates. Check out 06/1981, 19.10%. Woof!
No. I didn't know the first six years had a Republican Senate. That's one on me.
August 28, 2008 12:09 PM | Reply | Permalink
You're right, I went back and looked, there IS an Impeach Bush link there, kinda unnoticed among the rest, but there.
Yes, it does show Clinton's last year, in figures it was 2000, not the 20 days in January of 2001 wehn CLinton was still President, its even titled "Year 8". The chart reflects results at the end of each year.
August 29, 2008 9:06 AM | Reply | Permalink
Yes, wealth DOES trickle up. The reason it trickles up is because those with more of it have the flexibility to make non-consumption investment. Someone who only has a few hundred dollars of wealth isn't going to get a high return on their investment. People with more money are able to satisfy their own basic needs as well as invest money at larger rates of return. http://www.dailykos.com/storyonly/2008/8/19/1552/88448/20/570519
One role of government should be to counter-balance that natural rise of inequality in any capitalist economy with a progressive income tax.
August 28, 2008 11:22 AM | Reply | Permalink
I think what you meant to say was something like the top 1% of taxpayers should be enslaved and give all their money to Washington.
August 28, 2008 11:51 AM | Reply | Permalink
"The theory doesn't make sense even on its face. Why would people work harder only if you cut their taxes? After all, their after-tax income goes up, so they might decide they can work less and still be as well off. Or, if you raise their taxes, they might decide to work harder to make up the after-tax losses."
Thank you for saying that.
This has been obvious to me for a long time, but I have never heard any pundit say it. In fact, even liberals are apt to parrot the idea that higher taxes always and everywhere discourage work and investment.
As you say, it just obviously makes no sense.
August 27, 2008 11:28 PM | Reply | Permalink
Actually, one of the perverse reasons why I'll vote for Obama is to put to rest the idea that higher taxes from Clinton helped the economy. If you look at Ireland and Russia you'll see a story of how lowering taxes made them more powerful. Then look at Detroit and California to see what happens when raising taxes.
But, as Ellen correctly points out above, nothing in economics is truly absolute because everything depends on context. New York city can raise taxes and still grow because the city provides the opportunity to make considerably more than the tax hike. In a failing place like Detroit, tax hikes are nails in the coffin.
Right now the country is stressed by competition from abroad, adding to that burden is not a good idea. But then, some people just have to see it for themselves.
August 28, 2008 7:51 AM | Reply | Permalink
I just want to ask, do you see a 600 billion dollar deficit as a problem, and if so how do you balance the budget to stop the country from going into debt?
August 28, 2008 9:34 AM | Reply | Permalink
Drat, I forgot to do the reply button. Anyway, I also forgot to include the link to debt as a percentage of GDP. 2nd table last column.
August 28, 2008 10:14 AM | Reply | Permalink
While I'm at it
Actually it was Clinton in 1997 that reduced the rate from 28 to 20%. Interestingly, just before the budget surpluses. Hmmmm. Bush only knocked off 5%.
It's usually a good idea to factcheck conventional "wisdom" before signing on to it. Also interestingly, the market crashed, and economy went into recession, while the magic Clinton income tax rates, were still in effect. Hmmmm.
You might consider that Ellen is correct and that without the cuts we'd be truly in trouble.
August 28, 2008 10:29 AM | Reply | Permalink
shooter42 says:
We went into recession AFTER the Clinton Capital Gains tax cut was still in effect?? WOW!
The last recession we had started under Bush.
NEW YORK (CNN/Money) - The world's largest economy sank into a recession in March, ending 10 years of growth that was the longest expansion on record in the United States, a group of economists that dates U.S. business cycles said Monday.
http://money.cnn.com/2001/11/26/economy/recession/
Explain today's market performance under Bush gang and their tax cuts;
DOW on Jan 4, 2001 = 10,912.. Today, 7.5 years later = 11,693.
Performance under Bush and the Republican Congress fiscal policy kind of anemic, isn't it?
August 28, 2008 12:10 PM | Reply | Permalink
I'm going to give you points for picking up on the cap gains cut not staving off said recession. Perhaps something else precipitated the decline that had nothing to do with taxes? Like the demise of the Y2K meme? Context is everything.
August 28, 2008 12:36 PM | Reply | Permalink
shooter242 says:
Wasn't the Clinton cap gain tax cut in place? It obviously didn't do much for people to "invest and get this economy moving again."
Tell me, what grand things came out of the Bush tax cuts? No speculating, now.
August 28, 2008 12:50 PM | Reply | Permalink
August 28, 2008 1:02 PM | Reply | Permalink
Where did the $600 billion figure come from? This story says $485 billion. It's still horrendous, but nearly 25% lower than your figure.
I think it's going to happen naturally with a little prodding from fiscal conservatives. The desire to adventure abroad has been tempered by recent experience. I also half jokingly advocate the closing of all 704 overseas bases, and letting the world fight it out amongst themselves.There's also the problem of Democrats setting up the pork system so nobody has to be responsible for any given project. Giveaways are inserted into conference bills without votes. It's a license to steal.
Lastly, $100 billion was spent in the last stimulus check giveaway, to no effect. That is not helping matters.
In the end, we have more than enough money floating around Washington, it's expenses that have to be curtailed.
August 28, 2008 10:08 AM | Reply | Permalink
600 billion would be the 485 billion projected plus the military spending on Iraq, afghanistan, plus any natural disasters that come under emergency spending, I am assuming here we will spend money on those places, and 100 billion would be a rough estimate. I am amazed at the lengths that are gone to to justify and minimize the deficit, correlation with GDP are brought up, lots of higher level economic theory...
We do not take in as much as we spend. Thats it.
And we are not putting up 600 billion in emergency spending to build infrastructre or on anything likely to return value to the economy, this is a shortfall in operating capital. I would like to know where 600 billion in washington excesses are going to come from. A few parts of the government with roughly a 600 billion dollar budget for you to choose from, the department of defense, Health and human services, Social security, or the treasury dept.
Cutting a few million in pork projects just doesn't cut it, there is a major shortfall between what we spend and what we take in. If your looking for pork that they put into the roads projects, the entire budget of the transportation dept is about 70 billion per year.
That 100 billion in stimulus is something I am opposed to, just seems wrong, kind of like throwing bread to the mob back in roman times, but it did seem to push up growth in the 2nd quarter, or at lest something did. Bottom up economics?
August 28, 2008 2:05 PM | Reply | Permalink
I would like to know where 600 billion in Washington excesses are going to come from.
From where it's been coming for years -- China (PBoC), Japan (BoJ), and the oil exporting countries (GCC).
August 28, 2008 2:41 PM | Reply | Permalink
Let me clarify:
Where are you going to cut out of the budget 600 billion in excesses?
August 28, 2008 2:46 PM | Reply | Permalink
Actually if you just froze spending at current levels, it would go a long way. The institutional problem with Washington is that anything less than budgetary request is called a cut.
If Obama gets elected, I have little doubt the defense budget gets cut. But since transfer payments (pensions, SS, welfare, etc) comprise two thirds of the budget, there will have to be a claw back on entitlements.
Either that or we start making everybody pay income tax.
August 28, 2008 6:26 PM | Reply | Permalink
You are off by orders of magnitude. Just keep spending at current levels? I guess inflation doesn't effect the budget then.
Again, eleminating Social securitry entirely would bring the budget into balance, provided you keep charging payroll taxes for no benefit.
Why can you not bring yourself to admit that there needs to be more tax revenue?
August 28, 2008 7:05 PM | Reply | Permalink
Trickle down economics is about as dead as Marxism and psychotherapy...and for the same reasons.
August 28, 2008 11:32 AM | Reply | Permalink
August 28, 2008 8:32 PM | Reply | Permalink
What spending do you need to curb to get to a 600 billion dollar shortfall. Please tell me. Eliminate the entire military? All of medicare and medicade? Tell me anything that comes even close. We are not taking in enough tax revenue. This costs us more every year so that now the forth largest expenditure in the budget is interest on debt. It is the second larget expenditure in the general fund after the military. Tell me how this is not a problem. Half a trillion dollars wasted on interest every year.
August 28, 2008 9:20 PM | Reply | Permalink
Do you have any idea how much you'd have to raise taxes on the high end to come up with $600B? A lot more than any sane politician is going to demand.
You need to keep in mind that the top 20% of taxpayers already pay some 86% of the income tax. I'm also currently guessing that SS limits will be lifted while high end taxpayers will be means tested out. In addition the tax cuts will likely lapse back to Clinton era rates. If that's the case, for a lot of people the new tax rate will be 39.6%(income)+ 8%(state)+7.3%(SS)+1.3%(Medicare)= 56.2% for anything over (guessing)$300,000. 63.5% for the self-employed.
While I'm sure you little sympathy for anyone making that kind of money, the idea that after a certain point government takes more from each dollar than one gets to keep , is anathema to free enterprise.
Always remember the golden goose can take stock options, or move offshore if pushed hard enough.
August 29, 2008 5:02 AM | Reply | Permalink
Your mortgage payment is mostly interest, and it is also a 30 year investment likely to appreciate in value, maybe not next year, but certainly over 30 years. This brings us back to why the bush tax cuts were so bad. Now that we are an additional 5 trillion in debt due to taking the irresponsible way out to get elected, our budget has swelled an additional 250 billion per year in interest.
It is not that I do not have sympathy or wish to punish higher income earners, I think our current tax system should be scrapped and replaced with a flat tax rate on all income, capital gains included.
I still do not see how going further into debt helps strengthen the economy, especially now that we cannot sell all the bonds to cover the short and are keeping the printing presses running. I would hate to see what happens when bond rates start to go back to market forces, that 500 billion in interest we pay now could swell dramatically if rates push back up to the 7-10% range.
We need more tax revenue, be it in the form of cap gains, closing loopholes, corporate tax, tariffs... I don't care what but this is an unsustainable trend we are on, and no amount of economic theory can justify it, and no platitudes about curbing gov't spending will come close to closing the gap.
August 29, 2008 10:37 AM | Reply | Permalink
Jared,
Why does your analysis of wages exclude benefits? Haven't benefits risen in cost faster than inflation? Aren't benefits comprising an increasing share of a worker's total compensation?
September 1, 2008 9:32 AM | Reply | Permalink
Isn't it possible that some other event might have skewed the results for the past 8 years? Call me silly but I have even heard that 9/11 had somewhat of an adverse impact on our economy.
The problem with using scientific statistical data on our economy is that there is no control group so it is actually quite difficult to pin lack of improvement in median household income on the failure of trickle-down economics.
Considering that this country wastes hundreds of billions on a failed war on drugs, wastes hundreds of billions more in entitlements, wastes billions on a flawed tax system, etc. and billions more on illegal immigrant health and education issues, it is amazing that real median household income hasn't tanked here as it has in almost all of Europe.
But of course, Europe would have less unemployment and better economic data if only they had the advantage of trickle-down economics as we do.
Whatever problems we have in this country are due to too much government interference. There would be more to trickle down if our tax code wasn't so punitive to corporations that most of our industry has gone to lower tax countries.
It is interesting to note that leftists always blame Capitalism when in fact if anything is wrong it is precisely because of leftist intrusions.
October 21, 2008 7:03 PM | Reply | Permalink