In my last post, I talked about how a fairly small group of Republicans, initially headed by Dick Cheney and Donald Rumsfeld, made "trickle-down economics" the guiding philosophy of the GOP - and, hence, for much of the last 30 years, of our nation.
It almost goes without saying that this approach has failed. The idea that cutting taxes produces enough growth to raise revenues has been proven wrong (and no serious economist ever believed it anyway, for realistic levels of taxation). But at the end of the day, raising tax revenues is not the goal of the government; raising living standards is. So did trickle-down create a rising tide that lifted all boats? In a word, hell no:
The growth in US inequality during the [last 30 years] was undeniable (though that didn’t stop some commentators and thinktanks trying to deny it). So, optimistic assessments of economic performance during the Great Moderation appeared to support the claim that rising inequality must be good for, or at least consistent with, economic growth that would ultimately benefit everybody.
Now, in the wake of the global financial crisis, this claim can be seen to be unambiguously false...
The raw data on [U.S.] income distribution shows that households in the bottom half of the income distribution gained nothing from the decades of [tax-cutting and deregulation]. Although apologists for [trickle-down] have offered various arguments to suggest that the raw data gives the wrong impression, none of these arguments stand up to scrutiny. All the evidence supports the commonsense conclusion that policies designed to benefit the rich at the expense of the poor have done precisely that...
For those at the bottom of the income distribution, there have been no gains at all [in the past 30 years]. Real incomes for the lower half of the distribution have stagnated. The same picture emerges if we look at wages. Median earnings for full-time year-round male workers have not grown since 1974. For males with high school education or less, real wages have actually declined.
Since the poverty line has remained unchanged [since 1974], this means that the incomes accruing to the poorest 10 per cent of Americans have actually fallen over the last 30 years...
[Economists] Andrews, Jencks and Leigh simulate some results for the US suggesting that even assuming that the increased inequality in the US after 1970 produced permanently higher economic growth, those outside the top 10 per cent of the income distribution would not have gained enough to offset their smaller share of total income over the 30 years to 2000.
So, it didn't work. The rising tide lifted only the boats at the top, while everyone else stayed essentially stagnant.
So why did people buy the trickle-down theory? Well, to answer that question, let's first consider the following statement:
"Hard-working and intelligent people produce most of the things in the world, so rewarding and encouraging these people will lead to more things being produced."
Ask yourself: Deep down, do you believe in that statement? If so, does it seem to you like obvious truth?
But the thing is, if the first part of that statement is right, the second part is probably wrong.
Here's why. "Watering the green spots," as it were, runs you up against the law of diminishing returns. The green spots are already green; the rich are already rich, the skilled are already skilled. Using the tax system to give those people more money will just result in them sticking it in a bank (the bank will then lend out the money, mostly to poorer people, at high interest rates).
This is one mistake Japan made in the 1980s - the government tried to offer support to the nation's most productive companies (Toyota, Sony, etc.), which had little room for improvement, and neglected the legions of less-productive companies. Trickle-down economics is just discredited old-school industrial policy applied to individuals instead of firms.
In other words, don't confuse total productivity with marginal productivity.
Many politically moderate Americans have had this nagging thought in the back of their minds over the last three decades; on some level, they realized that giving extra money to rich people is not going to do much. So Republicans had to come up with ad-hoc reasons why favoring poor people was a bad idea. One of these arguments was that poor people are poor because they're lazy or dumb. Lazy, dumb people have even less room for improvement than rich people, so we might as well favor the rich. (In the realm of academic economics, the "dumb" part of this hypothesis has been called "skill-biased technological change" - or, as I call it, the "black people are too dumb to use computers" theory.)
Another reason was moral - the idea that rich people deserve favorable tax treatment as a reward for a job well done. This is the philosophy of Ayn Rand, a favorite author among trickle-down types.
The third reason was the idea that Americans wouldn't work as hard to raise their earnings if super-rich people were taxed at higher rates. As if anyone would say "Screw it, I'm not getting super-rich; the taxes are just too high." Incidentally, top marginal income tax rates have gone from almost 90% down to 35% over the last 35 years, and middle-class and poor Americans are working less.
Some people bought into these bogus reasons. But not all, or even most; contrary to popular belief, Americans have plenty of common sense (not to mention Google News). Intuitively, we know that the best policies to promote growth would focus on building up the capital and skills of those who have the most room for improvement - policies like improved education, job-finding and training assistance, consumer financial protection, better infrastructure, etc.
What's more likely, I'm guessing, is that trickle-down succeeded despite the fact that few people really believed in it, because Republicans were able to exploit divisions among Americans that had little to do with class. I'm talking, of course, about race. Economist Ed Glaeser (a conservative himself) backs me up:
[Our study] concluded that the [income] redistribution gap between the United States and Europe could best be explained by America’s greater ethnic heterogeneity...Countries with more ethnic diversity generally spend less on social programs.
Before welfare reform, US states with more African-Americans were significantly less generous to their welfare recipients. My colleague Erzo Luttmer found that people in the United States who live around poor people of a different race are more likely to oppose welfare spending. There is a long historical literature, written by scholars like C. Vann Woodward, documenting the role that racial divisions have played in blunting the appeal of populist redistributors in the United States and elsewhere.
Republicans basically persuaded a thin majority of white voters that taxes would be taken out of their pocket and put into the pockets of black people (who were poor because they were lazy, dumb, etc.). If you ask Republican voters about taxes and government spending, it quickly becomes apparent that most of them still believe this. The Committee to Pillage America got us thinking not in terms of overall national productivity, but in terms of a struggle for distribution of wealth between racial blocs. They were helped enormously in this task by the existence of the Solid South, our civilization's conjoined twin, whose core values include the suppression of the black race.
And so, against their better judgment, Americans grudgingly accepted the bogus economic swindle known as trickle-down economics. We voted for Reagan enthusiastically, voted for Newt impulsively, and then held our nose and voted for Bush twice. And as our reward, our incomes stayed flat for a generation, our inequality rose to third-world levels, and - worst of all - our national institutions (the budgeting process, the civil service, infrastructure and education) were burnt to hollow husks. Meanwhile, Cheney and Rumsfeld and their exclusive little clique laughed all the way to the bank.
Mission accomplished, I guess you could say.
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