Wednesday, February 24, 2010


Have you ever wondered why Wall Street's financial institutions have been making record profits, but none of it has "trickled down" to Main Street? Wonder no more. It has a lot to do with what Wall Street claims to have "earned" over the past 40 years (empty profits), and what it actually does (extract wealth).

As a reminder, it was Ronald Reagan who ushered in the era of "trickle down" or "supply-side" economics. The central argument is that if we put more money into the hands of those who already have money they will increase their investments. This, in turn, will lead to more industry jobs. With more jobs more people will have money to consume (I know, I know ... "Whatever happened to demand driving supply?" ... it's their playbook, so play along here).

The follow-up budget deficits that were supposed to materialize from massive tax cuts would then - according to the trickle down theory - be offset by new consumer spending. This would generate new tax revenue. And just like that, everyone lives happily ever after. See the genius in the theory?

To make the theory work Republicans called for tax cuts for the rich and deregulation for "the market" (to help inspire the rich invest their money).

We've enacted these trickle down & deregulation policies for the better part of 30 years. What do we have to show for it? Lower taxes on the rich, and a slew of favorable legislation for people who have become increasingly reckless. The result has been a continuous transfer of money to America's wealthiest class so that income growth, which was relatively equal between 1943 and 1979 (light blue columns in chart), has become disproportionately skewed to America's already wealthy, as we saw between 1973 and 2005 (darker "greyish" column).

Here's another chart demonstrating the same negative effect of deregulation and tax cuts for the rich on middle America.

If you're having trouble digesting all of this, let's make this simpler. Since what we now call supply-side, or trickle down, economic policies were introduced (keep in mind that pursuing tax cuts for the rich started long before Reagan), those at the top of America's income escalator are living something like this ...

With wages, and purchasing power, effectively stagnating because of these policies (and rising prices) what all of this suggests is that a large proportion of the economy’s growth, and it's productivity gains, over the past 30 years are not being enjoyed by workers and consumers. The real gains have been going to America's CEOs and other economic elite ...

Because America's middle class is not seeing relatively lower prices or higher wages, the share of America's income and overall wealth has been growing faster for America's already wealthy than it has for the rest of us.

Things don't get much better if we just look at America's top 1% of income earners (those making about $376,000 or more per year). Comparatively speaking, they are raking in about 60% of all income. Compared to other industrialized nations, this puts America at the top of the heap in terms of growing income inequality.

Why is this increased concentration of wealth occuring, in spite of almost thirty years of supply-side, trickle down economic policies? If you listen to conservatives this is happening because those in the bottom 90% (those making about $103,000 or less per year) aren't working hard enough, or because they're simply losers.

Demonstrating their complete ignorance of the impact that favorable legislation, legal protections, subsidies, tax breaks, write-offs, inheritance, etc. have on wealth, those on the far right will even say it's survival of the fittest at work ... only the those at the top deserve what they get because they're smarter and more talented. It has nothing to do with favorable legislation, or other factors.

Those of us who walk upright disagree.

For example, the National Bureau of Economic Research's Robert Gordon and Ian Drew-Becker point to a decline in unionization, increased trade, increased immigration, a decline in real minimum wages, and the impact falling income tax rates (for the rich) have had on growing income gaps. In fact, tax cuts have had a demonstrably positive effect on the income and wealth of America's top 1% of income earners (again, about $376,000 and above).

With America's middle class making comparatively less - which has made it difficult for Main Street, especially with rising consumer prices (play with the graph, it's fun) - and with taxes going down on America's wealthiest groups, it should come as no surprise that our federal debt skyrocketed from about $975 billion in 1980, when Ronald Reagan entered office, to around $12.5 trillion today.

Worse, the deregulation policies that Wall Street asked for throughout the 1980s and 1990s contributed to the greatest market collapse since the Great Depression and, by far, the greatest bailout of market stupidity in human history. 

Seriously. Building up and leveraging debt contracts, and then gambling on whether they would pay out was not a bright idea. Yet, Wall Street did it because they could. Deregulation and favorable legislation let them do it. And this is the point I'm getting at.

Since we embarked on policies that gave tax breaks to America's richest groups, rather than getting the promised "trickle down" effect of more jobs and reduced budget deficits we have seen wage and wealth gaps increase, while Wall Street has done what it's wanted to do. Our national debt has soared too.

Money claims on income "earned" from shady, unregulated insurance bets (Credit Default Swaps on Collateralized Debt Obligations, among others), have shot through the roof for Wall Street's biggest players (represented by M-3). What you and I have to work with (checking and savings accounts, represented by M-1) has not kept pace.

(Note: M-3 data was suspended as a "cost saving" measure by the Bush administration in 2006. I discuss the real reasons in my book)

U.S. Money Supply (selected years)
Year       M-1                M-2                 M-3 
1964          $160 billion              $425 billion               $442 billion
1972          $249 billion              $802 billion               $886 billion
1974          $274 billion              $902 billion               $1.070 trillion
1975          $287 billion              $1.017 trillion            $1.170 trillion
1984          $551 billion              $2.312 trillion            $2.991 trillion
1994          $1,150 trillion           $3.498 trillion           $4.370 trillion
2002          $1,219 trillion           $5.801 trillion           $8.568 trillion
2003          $1.306 trillion           $6.062 trillion           $8.872 trillion
2004          $1.376 trillion           $6.422 trillion            $9.433 trillion
2005          $1.375 trillion           $6.692 trillion           $10.154 trillion
2006          $1.367 trillion           $7.036 trillion           $10.299 trillion
2007          $1.367 trillion           $7.447 trillion                  N/A
2008          $1.600 trillion           $8.108 trillion                  N/A
2009          $1.546 trillion           $8.110 trillion                  N/A

What does this mean for you and me? Very simple. The earnings and income gains of Wall Street and America's biggest market players was based on a number of factors that were not tied to the invisible hand of the market. From favorable legislation, tax breaks, tax write-offs, deregulation, globalization, attacks on unions, immigration, declines in minimum wages, etc. the "earnings" and recent wealth increases that have accrued to America's wealthiest over the past 30 years has come off the backs of America's middle class.

Don't believe me? Check out personal debt loads in America. In fact, take a look at what has happened to personal obligations and government debt loads over the past 30 years.

Because the focus over the past 30 years has been to extract wealth, rather than build it up through innovative investments that would create jobs (as the trickle down model was sold), it should really come as no surprise that what happened in 2008 occurred. The goal of Ronald Reagan was simply to get more money into the hands of the rich, and to keep it away from America's middle class. Favorable legislation, subsidies, corporate write-offs, tax breaks, and other favors for America's upper crust were  the tactics used to achieve the goal.

Put another way, trickle down and supply-side economics was always a farce. Or as George H.W. Bush once noted, it was little more than Voodo economics from the very beginning.

So can we finally dispense with the trickle down notion that tax cuts for the rich (on their own) is a viable economic plan?

- Mark

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