Trickle Down Economics Doesn’t Work

This post will not be totally non-partisan, but I promise that it will be fair and educational.  Today, we’re going to talk—in simple, basic terms—about the economy.  For your convenience, I’ve hyperlinked to a ton of articles that provide additional data or support my claims, and I definitely encourage people to check those out if they have time.

Wages, Corporate Profits, and the Distribution of Wealth

To begin with, consider a recent article in the New York Times: “Recovery in U.S. is Lifting Profits, but Not Adding Jobs.”  The author, Nelson Schwartz, explains that while corporate profits have hit all time highs in recent years, these gains have not benefited employee salaries or the overall economy.  Unemployment is low, sure, but while corporate earnings have risen about 20% per year since 2008, disposable income has risen only 1.4% during the same period.  If that peaks your interest, the article is definitely worth a read.  But wait: there’s more.

“In 1988, the income of an average taxpayer was $33,400, adjusted for inflation.  Fast forward 20 years, and not much had changed: The average income was still $33,000 in 2008, according to IRS data.”  This, according to a CNN article, shows that it’s not just that in the last few years that wages have stagnated.  It’s been decades.  During that same period, “the richest 1% of Americans—those making $380,000 or more—have seen their incomes grow over 33% over the last 20 years.”  The causes, according to experts cited in the article: the decline of labor unions (down from 20% of the workforce in 1983 to 12% in 2010) and international competition, i.e. outsourcing and the loss of blue collar manufacturing jobs.

Now, watch this video.  Trust me: it’s important.

OK, so taken together, the rich people in our country are fantastically wealthy and corporate profits are at an all time high, yet wages are about the same as they were in the 80’s.  Also, the lower and middle class are unbelievably poor compared to the wealthiest 20% in the US.  These facts that cannot be disputed.

Here’s where it gets partisan, because the Republican Party’s current economic agenda looks something like this: cut taxes, protect tax loopholes for corporations and wealthy Americans (even if those loopholes allow them to ship jobs overseas), prevent new regulations on businesses, import highly skilled immigrants to take American jobs, and cut government spending.  If you don’t believe me, take a look at the plan put forth in 2012 by the House GOP, titled, “Plan for America’s Job Creators.”  They’re also on record as opposing the President’s proposal to raise the minimum wage.

What’s so troubling about their plan, is that none of their ideas will help ordinary Americans, or provide any kind of boost to the economy.  Indeed, their proposals (aside from decreasing government spending) are almost exclusively intended to lift corporate profits. Simply put: enabling corporations to make more money, as Republicans are proposing, isn’t going create more jobs or increase incomes for ordinary, working-class Americans.  Instead, it’s going to be the same thing that’s been happening since the 1980’s: the rich get richer and the poor get poorer, or at best tread water.  Why?  Because trickle down economics doesn’t work.

The Debt and Deficit

Then there’s the debt and the deficit, which are causing panic among Republicans, some Democrats (including Obama), and the media, so much so that they’ve made incredible efforts to convince ordinary Americans (many of whom don’t know any better) that they should be panicking as well.

First of all, the debt and deficit are two different things.  The debt is the total amount the U.S. has borrowed from investors to finance spending.  The deficit is the amount, per year, that the government has to borrow to pay its bills.  Regrettably, the right wing media attempts to exploit this misunderstanding.

Second, contrary to popular belief, our deficit has been reduced significantly since Barack Obama became President, even though our debt continues to rise because we’re still spending more money than we collect in tax revenue.  Moreover, our overall debt is not that high or worrisome, especially in historical terms.

But wait, isn’t the debt crushing the economy and killing jobs?  No.  To illustrate how absurd an idea this is, let’s answer this question with others: is a homeowner with a mortgage unable to buy a car?  Are they unable to work a job?  Are they unable to buy and sell goods and services?  More to the point, is the person who lives next to them going to lose their job?

No, no, no, and no, and that’s because the size of the debt and the state of the economy are largely unrelated.  Government debt only affects the economy if investors believe that the government is going to collapse and not be able to pay its bills.  Right now, investors in the US are so concerned that our government is going to collapse that interest rates are almost 0%.  Since interest rates are based primarily on two factors: 1) the rate of inflation, and 2) the risk that the borrower will not pay the lender back, a 0% interest rate tells us that currently, the rate of inflation is extremely low, and the risk that the U.S. government won’t pay its bills is zilch, nada, nothing.  The only people who’ve ever proposed that we not pay our debt are—drumroll please—the Republicans.

Why Cutting Government Spending Hurts the Economy: Austerity

Do we have to deal with our deficits and eventually pay back some of the debt?  Sure.  But here’s the problem with doing it right now: cutting government spending results in fewer jobs.  Why?  Because it reduces demand—it means there is less money in the economy.

An excellent example is happening right now near U.S. military bases.  Recent spending cuts (aka the “Sequester”—which was spawned in the summer of 2011 when the Republicans caused us to default on paying our bills for a short time) have caused the Pentagon to furlough (take unpaid days off) some military employees for one day each week.  In turn, these employees have less money to spend, forcing them to cut back on going out to eat, buying furniture, cars, etc.  The end result is that there is less economic activity—not just for those military workers who are directly affected, but for everyone in the community, and ultimately, for all of us.

Now, does it seem that cutting government spending, a policy which reduces demand, economic activity, and costs jobs when the average American is making around $30,000 a year?  No, it’s a terrible idea, and you’ve probably heard of it before: it’s called austerity.

It is the reason that Greece and Spain are now enjoying 25% unemployment (and it’s closer to 50% for young workers in those countries).  You might also consider Ireland, Italy, and Great Britain as well.  All of these countries have enacted austerity measures in the face of government debt, and the results have all but shut down the European economy.

So what should we do?  We should have a massive government spending program aimed at improving infrastructure and education like Bernie Sanders is proposing.  By doing so, we would effectively upgrade our economic system and improve the skills of our labor force, while at the same time creating millions of high paying jobs (construction workers, engineers, teachers, etc).  Then, once the economy was growing significantly, we could decrease government spending and pay down our debt without hurting growth, jobs, or the economy.

Unfortunately, that is not what anyone in Washington is talking about, which is why educating our friends, neighbors, family, and coworkers about the economy is critical.  Because until we show our leaders that we’re actually paying attention and we won’t buy their B.S., they’re going to keep squabbling about the debt and deficit.

Worse, Republicans are going to keep telling us how great it is for the economy if we cut taxes for the rich and powerful. BS. Cutting taxes for the Rich and Powerful is good for one group of people: the Rich and Powerful. The fact that every idiot on the stage at the GOP Debate thinks it’s good for everyone is frightening.

About The Author: Jay Scott


  • Reply oblma

    I bet Obama will make a couple cool million from his corporate croonies.

  • Reply oblma

    WRONG “Why Cutting Government Spending Hurts the Economy”

    The federal government spends roughly 24% of the entire GDP, Your logic suggests government should employ everyone. Federal govenment no real responsibility to provide education, healthcare or jobs. You are nuts, you’ve gone koo-koo for Coco-Puffs.

  • Reply Bo

    “Ok, I spent one whole blog being non-partisan and helpful”

    Oh brother…

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