Supply Side Economics: The Fatal Assumption

Back in the late 70′s, there came the idea of “trickle down economics.”  The basic idea, at least as it was put to the public, was that by reducing the tax rates on the rich and corporations, they would have more money to invest, which would create more jobs and economic activity farther down.  In other words, by the government taking less from the wealthy, the benefits would “trickle down” to the rest.  As more businesses and jobs were created by this, pay scales would rise and with it, the government would receive the same – or more – tax revenue than it would have had it continued with the previous tax schedules.    As a theory, it sounded good.  In practice, it has been a miserable failure.   It turns out there was a core assumption being made, that in practice turned out not to be the case.  An “implied contract” that was broken.

What was the core assumption?  That the increased money from tax savings would be invested in this country. It was assumed that businesses would use the extra money to increase manufacturing facilities and hire new workers.  The wealthy would use their additional funds to invest in new businesses, and increase their purchasing.   Instead what happened was first a round of acquisitions and mergers, resulting in a series of lost jobs, followed by the use of those funds to invest in moving manufacturing and jobs overseas.  It was a terrific policy in terms of generating jobs and economic activity -  for other countries.    In terms of this country, it’s been terrible, unless you’re wealthy.

The result has been an increase in the income of the wealthiest Americans, while the lower levels have lostMother Jones magazine has some wonderful graphs showing it:

If you’re in the top 20%, you’ve done fairly well.  If you’re in the top 1%, you’ve done extremely well.  Everyone else?  They’re worse off than they were in 1979.   Even more, the result has been a concentration of wealth, as this graph shows:

Look at that again.  The wealthiest 20% control over 80% of the national wealth.  The top 10% control 2/3rd’s of the total wealth.  What is equally obvious is that many (if not most) don’t realize it, and their “ideal” is not even close to the reality.  Back in the ’80′s, I used to hear this phrase a lot:  “A rising tide lifts all boats.”  It was one of the justifications for implementing the tax breaks and other aspects of supply side economics.  What has become apparent is that only a few boats rose, while the rest were firmly anchored with holes drilled in their hulls.

The Republicans haven’t stopped touting it though, and using the same arguments they made back in the ’80′s to keep the tax breaks or expand them.  Once again, they’ll tell you how badly they’re needed, and how that doing away with them will mean less money to invest.  But the problem is that it hasn’t worked.  Which means they’re following Einstein’s definition of insanity: doing the same thing over and over again and expecting different results.  Whether supply side would have worked if the people who had received the tax breaks had lived up to their side of the bargain is something that can be debated endlessly.  The reality is that they didn’t live up to it, and no, we shouldn’t trust them to do it “this time.”  They’ve already shown they can’t be trusted.

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9 Comments

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9 responses to “Supply Side Economics: The Fatal Assumption

  1. overseasgranny

    Need to pimp this please, Norbrook:

    This is from the Virtual Wisconsin State Employees Unions Solidarity
    Vigil: The Page
    CommunitOnondaga Facebook at
    http://www.facebook.com/pages/Virtual-Wisconsin-State-Employees-Unions-Solidarity-Vigil-The-Page/166187250097705:

    Three senators are wavering. CALL or EMAIL Senator Randy Hopper -
    (608) 266-5300 Sen.Hopper@legis.wisconsin.gov Senator Luther Olsen -
    (608) 266-0751 Sen.Olsen@legis.wisconsin.gov Senator Dale Schultz -
    (608) 266-0703 Sen.Schultz@legis.wisconsin.gov
    (re-post PLEASE!)

    I apologize for the interruption.

    • Hopper and Olsen are in districts that Obama won in 2008 and one of them (Hopper I think) just barely won. That is why they are vulnerable. They will come up for re-election in 2012.

      Dale Schultz is the one who floated the silly “compromise” to kill collective bargaining for 2 years and then bring it back. Like a magic pony! If it is worth having (as that suggests) it is worth keeping. I would not trust these Republicans to allow it back.

  2. There are few theories of economics more discredited than trickle down economics. That it is still mentioned is a testament to the myopia of the Republican party and their insistence that we not progress past the 18th century. Who needs science and facts when you have ideology to guide you?

    That income gap should be chilling to anyone who cares about America. We can’t live that way with so many haves and have-nothings. At some point it is going to lead to real civil unrest.

  3. Great column, Norbrook. I hope we’ll explore this in some depth at BPI over the coming weeks.

  4. J Brunner fan

    Thanks Norbrook, excellent analysis. If it is ok with you was going to cross post @ DK in all block quote. I think it is worth sharing.

    If it isn’t ok you have my email address.

  5. Nathan Katungi

    Excellent work Norbrook! With your permission, I would like to print your article and share it with my colleagues.

  6. Nina

    For da animalz in da house, pass it on ! Or Charlie Sheen will make you sorry you didn’t ;0