It's fiscal fact time. The way things have been, and the way the Romney/Ryan plan works, is to keep pushing our public and private financial resources higher and higher, concentrating wealth at the very top of the socioeconomic food chain, so to speak. The idea is that, like clouds so full of air-borne water they just can't hold any more and release the excess in great torrents of life-sustaining rain, wealthy individuals and corporations will somehow release a gushing flow of their treasure into the parched banks accounts down below. This is the trickle-down fantasy. Below is the reality. Please welcome Theoclea.
I want to heartily thank Inda for inviting me here. To preserve my privacy, I will be writing this article under the penname Theoclea.
I am a young political economist. I think and write regularly about political and economic issues. I have an undergraduate background in political science and economics from the University of North Carolina and Duke University, and am currently studying commerce at the University of Virginia. To the chagrin of my more radical friends, I have always partly identified as a libertarian. I believe that human dignity is found in the individual pursuit of happiness, as free as possible from her fellow man. But I also recognize that, in practice, dignity means more than freedom from government. It means freedom from poverty, from injustice, and from all external obstacles to achieving the full potential of her talents and will. Liberty cannot be realized without justice, fairness, and social welfare.
My peers are typically socially liberal and environmentally conscious; they genuinely care about helping the less fortunate. However, most are also fiscal conservatives. How can these young, compassionate conservatives support policies which have been shown to hurt the very people they want to help? The compassionate conservative wants to believe that free markets are perfect, and so overlooks the factual falsehood. It is from this viewpoint that I approach trickle-down economics.
Trickle-down economics mandates downsizing the government and offering tax relief for the wealthy. Trickle-down’s current incarnation is the “cut taxes, grow economy” policy espoused by Mitt Romney, among other modern conservatives.
Why is trickle-down so sticky in its political appeal?
Headwaters of the Trickle
To answer this question, we have to know the history of what we’re dealing with. Trickle-down is the pejorative term for supply-side “economics”. I use quotations here because supply-side ideology is not economics. The original supply-siders, who date from the early 1970s, were fringe-economists: consultants, congressional staffers, and journalists. Neither Robert L. Bartley nor Jude Wanniski, the founders and promulgators of the ideology, had any education in economics. The simple truth is that supply-side is not a field of economics recognized by any major university.
Trickle-down emerged from the most rudimentary understanding of conservative economics, and rests on two fantastically simplified tenets: 1) demand failures are impossible, thus demand-side policy is completely ineffective and should be eliminated; and 2) savings equals investment equals growth, therefore lowering taxes – especially on the wealthy – produces long-term economic growth.
Sadly, neither tenet holds water. General failures of demand are not only documented but are fairly commonplace – the most well-known example being The Great Depression. The second tenet rests on the idea that savings are invested, and investments increase future economic activity. High-income tax cuts follow logically from the savings-investment-growth axiom: the wealthy need to consume a smaller portion of their income, and thus are the best savers. Cut their taxes and they will save more, which means more investment and more growth. The rising tide would lift all boats and prosperity would trickle-down from the rich to the poor. Indeed, the trickle-downers and the politicians who listened to them believed that the resulting growth from a tax cut would be so large that tax revenue would rise instead of fall.
By the 1980s, the trickle-downers had convinced enough politicians (mostly conservatives) to mount a policy coup. Trickle-down’s appeal to a popular craving for an apparently simple and self-evident plan framed by an optimistic figurehead was realized by Ronald Reagan. The Reagan administration slashed income tax rates slashed regressively, cut social spending, and gutted federal regulations. The trickle-downers had unleashed the market and eagerly awaited their economic paradise.
This episode represents one of the greatest economic experiments in American history, and the results have been this: trickle-down economics had no effect on growth. See for yourself:
What Actually Happened
Tax revenue did not rise. In fact, the Reagan presidency marked the birth of the U.S. structural budget deficit, and began a massive buildup of national debt as a percentage of GDP.
Deficit and debt worsened. The deficit is the budgetary gap between government spending and revenue in any given year. From World War II to 1981, the federal budget had an unremarkable history: small deficits during recessions, small surpluses during growth. All this changed under trickle-down and the Reagan administration. The Reagan-era tax cuts created the first American peace-time structural deficit – meaning that unless Congress acts to change something, each year the federal government will automatically receive less revenue than it spends. This is shown in the graph below, which traces the federal deficit from the end of WWII to today.
Unsurprisingly, as the deficit increased, the national debt did, too. When you do not have enough money, you borrow some. The national debt represents the total sum of unpaid federal borrowing, funds used to finance the government when it runs a deficit. Prior to 1981, the US government had actually been paying down its debt accumulated during WWII. Following the 1981 and 1986 tax cuts, however, the debt began a steady ascent, broken only by a short reprieve during the Clinton years.
Trickle-down failed to deliver on its promise to improve the economic well-being of the majority of individual people or the nation as a whole. But it was not without consequence. Trickle-down policy had significant effects on income distribution. From 1979 through 2006, the richest of the rich enjoyed the biggest gains, and the poor actually lost income. It’s been the same ever since.
Current U.S. income distribution is one of the most unequal of any OECD country, more inequitable than that of Iran, Uganda, Nigeria, Kazakhstan, and 90 other nations. The legacy of trickle-down is mounting debt, deficit, and inequality.
So why is this idea so hard to kill? How can anyone run for president on such an idea? Especially a candidate who claims, as Mitt Romney does, that he desperately wants to eliminate the deficit and reduce the national debt?
I have always believed that (most) conservatives care about poverty and equality, and that if intelligent conservatives could be persuaded to change fiscal goals, it would be by appealing to their reason, not by attacking their supposed heartlessness. I value liberty enough to refuse to sacrifice the values of justice, fairness, and social welfare upon its altar. I urge compassionate conservatives to do the same, and to take a long, hard look at modern conservative fiscal policy. You may discover, as I did, that although trickle-down might look sweet, it stinks.
Editor’s Note: Theoclea strongly recommends Paul Krugman’s, Peddling Prosperity (W.W. Norton, 1994). Theoclea herself blogs at: http://theoclea.wordpress.com Please "Like" this on facebook and forward to all your most reasonable, GOP-leaning friends.
And if you’re a true Show-Me type, you can check the data in this essay here:
United States: Data. The World Bank
Historical Tables. The White House, Office of Management and Budget. <http://www.whitehouse.gov/omb/budget/Historicals>.
Data on the Distribution of Federal Taxes and Household Income. Congressional Budget Office <http://www.cbo.gov/publication/42878>.
"Country Comparison: Distribution of Family Income - Gini Index." CIA: The World Factbook. Central Intelligence Agency.