Day 12-Trickle Down Economics 101

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Reaganomics is a popular term used to refer to the economic policies of Ronald Reagan, which called for widespread tax cuts, decreased social spending, increased military spending and the deregulation of domestic markets. The four pillars of Reagan’s economic policy were to reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation.

Reagan’s tax policies were based on supply-side economics, which is a macroeconomic theory that argues economic growth can be most effectively created by investing in capital and by lowering barriers on the production of goods and services. … Typical policy recommendations of supply-side economists are lower marginal tax rates and less government regulation.

Trickle-down economics is a theory that says benefits for the wealthy trickle down to everyone else. These benefits are usually tax cuts on businesses, high-income earners, capital gains, and dividends. Trickle-down economics assumes investors, savers and company owners are the real drivers of growth. (Resource)

So why am I talking about this today?

This is the economic principle that Paul Ryan and the GOP, Tea Party conservatives believe in and it is shaping our current policies, from health care, to de-regulation, to their push to privatize everything. Reaganomics/Supply Side Economic Theory/ Trickle Down Economics all follow the same 4 principles, cutting taxes to the highest earners, reducing social spending, reducing governmental regulation, and believing the free market will determine winners and losers.

So did it work?

During the Reagan Administration, it seemed that trickle-down economics worked. Reagan cut taxes significantly. The top tax rate fell from 70 percent (for those earning $108,000+) to 28 percent (for anyone with an income of $18,500 or more). The corporate tax rate was also cut, from 46 percent to 40 percent.

Reaganomics ended the 1980 recession. It suffered from stagflation, which is both double-digit unemployment and inflation.

Trickle-down economics was not the only reason for the prosperity. Reagan not only cut taxes, but he also increased government spending by 2.5 percent a year. He almost tripled the Federal debt. It grew from $997 billion in 1981 to $2.85 trillion in 1989. Most of the new spending went to defense. It supported Reagan’s successful efforts to end the Cold War and bring down the Soviet Union. Trickle-down economics, in its pure form, was never tested. It’s more likely that massive government spending ended the recession. (Source: William A. Niskanen, “Reaganomics,” Library of Economics and Liberty.)

Trickle-down economics says that Reagan’s lower tax rates should have helped all income levels.In fact, the exact opposite occurred. Income inequality worsened. Between 1979 and 2005, after-tax household income rose 6 percent for the bottom fifth. That sounds great until you see what happened for the top fifth — an 80 percent increase in income. The top 1 percent saw their income triple. Instead of trickling down, it appears that prosperity trickled up. (Source: Steven Greenhouse, The Big Squeeze, pp.6-9.)

Despite its shortcomings, Republicans use trickle-down economics to guide policy. In 2017, Republican President Donald Trump proposed cutting taxes for the wealthy.

He also wants to end taxes on capital gains and dividends for everyone making less than $50,000 a year. Trump would lower the corporate tax rate to attract more corporations. He said it would boost growth enough to make up for the debt increase.

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First, the scope of the problem: in the past 40 years, none of our nation’s economic gains have gone to the bottom half of earners. The researchers find that since 1980, the average national income per adult grew by almost zero for the bottom 50 percent; “In contrast, income skyrocketed at the top of the income distribution, rising 121 percent for the top 10 percent, 205 percent for the top 1 percent, and 636 percent for the top 0.001 percent.” “In 1980, adults in the top 1 percent earned on average 27 times more than bottom 50 percent of adults. Today they earn 81 times more. This ratio of 1 to 81 is similar to the gap between the average income in the United States and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi.” (Article)

4 reasons why Trickle Down Economics does not work

Overall, data from the past 50 years strongly refutes any arguments that cutting taxes for the richest Americans will improve the economic standing of the lower and middle classes or the nation as a whole. To be sure, the economic indicators examined in this report are dependent on a variety of factors, not just tax policy. However, what this study does show is that any attempt to stimulate economic growth by cutting taxes for the rich will do nothing — it hasn’t worked over the past 50 years, so why would it work in the future? To put it simply and bluntly, Bush’s top-bracket tax cut is an ineffective attempt at stimulus that will not cause any growth — unless, of course, if you’re talking about the size of the deficit.

A major component of supply side economics is deregulation- what are the pros and cons of that? (Resource)

Advantages

Short term increases in jobs, increases in investments in businesses, more incentives to increase efficiency, more competition, allows for innovation, allows the free market to set prices which can cause a short term drop, for large corporations-allows them to amass more power and control over their industries. Lower taxes allows for more profit and could leave to more money being put back into the business or given to employees (though little evidence of this happening beyond CEO compensation)

Cons

Allows for asset bubbles creating crises and recessions, prevents new industries with infrastructure costs from forming, exposes people to fraud and excessive risk taking by companies that will do anything to gain a higher profit and appease share holders, social and community concerns are lost because profits are prioritized over common good. Rural and unprofitable populations are underserved, unions are devalued, unemployment will eventually rise as companies become more efficient, more automatized, and more concerned about profit. Monopolies become more common place, reducing choice over time, which will raise costs in the long run.

10 unforeseen effects on the deregulation push during the Reagan years 

  1. Job Losses
  2. Rural areas left out because it’s not as profitable
  3. Radio has no variety
  4. Too many choices, but no good choices
  5. Corporate take over of news
  6. Paying more for less
  7. Increased cost where there is no competition
  8. It has brought on technologies  (a positive effect)
  9. Increased bankruptcies of corporations
  10. Market crashes

The Kansas Case Study

Some graphs to show the concerns that those in the middle class are seeing since the deregulation and trickle down economic push in the early 80’s

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While I am no economics expert and I can see arguments for some positive effects of de-regulation and tax cuts (ie: lower costs to fly, increases in technology) the effects it has caused in wealth inequality, decreasing middle class wages, decreased social responsibility, and increased poverty has me very concerned and makes me more aligned with the democratic platforms and even more so with the progressive democratic wing like Bernie Sanders.

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