The Gloves Come Off: Republican Economic Theory Has “Never Worked”

Expect to hear it called class warfare, but President Obama talked about the economy on Tuesday and told his audience in Osawatomie, KS that supply-side (“trickle down”) economics and a simple ‘let the market take care of things’ philosophy have “never worked.”

Now, just as there was in Teddy Roosevelt’s time, there is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes — especially for the wealthy — our economy will grow stronger… if the winners do really well, then jobs and prosperity will eventually trickle down to everybody else…

Now, it’s a simple theory. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government. That’s in America’s DNA. And that theory fits well on a bumper sticker. (Laughter.) But here’s the problem: It doesn’t work. It has never worked. (Applause.) …

Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the investments that built this country and provided the basic security that helped millions of Americans reach and stay in the middle class — things like education and infrastructure, science and technology, Medicare and Social Security…

We simply cannot return to this brand of “you’re on your own” economics if we’re serious about rebuilding the middle class in this country. (Applause.) We know that it doesn’t result in a strong economy. It results in an economy that invests too little in its people and in its future. We know it doesn’t result in a prosperity that trickles down. It results in a prosperity that’s enjoyed by fewer and fewer of our citizens.

Why Osawatomie, Kansas? It’s where President Teddy Roosevelt delivered his “New Nationalism” speech in 1910. Read it and weap. “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.” That’s Teddy quoting Lincoln. “The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power” is straight Teddy.

Ironic, perhaps, that Obama referenced Teddy Roosevelt. He was a Republican President (1901–1909), you know, and founder of a Progressive party. He was also a trust-buster. Oh that Obama would follow in Roosevelt’s footsteps.

Here’s why we need more than a small dose of Teddy’s thinking today: The top 1% of American families controlled almost 25% of all the income in the country in 2004 (pdf, page 7). It was about 18% in 1913. Post-war until Reagan’s tax cuts it ran about 8-11%. By the way, he expected to be “denounced as a Communist agitator” for his 1910 speech in the same town (see excerpts to the right).

top income chart, US

Top Income, US

In today’s economy (2006 data), salaries account for a larger chunk of income for the 0.1% than they did in 1916: it’s up from 1% then to about 3.5% today. The top 0.1% of families held 12% of total American income in 2006 (page 8). These data are from research published by Emmanuel Saez, E. Morris Cox Professor of Economics at Berkeley. There’s no reason to believe that this has gone down in 2011 (but we won’t know for 3-4-5 more years).

Remember, 0.1% translates in English to one-thousandth of the population.

Paul Krugman quoted Congressional Budget Office research in a column that focused on inequality last month:

[B]etween 1979 and 2005 the inflation-adjusted, after-tax income of Americans in the middle of the income distribution rose 21 percent. The equivalent number for the richest 0.1 percent rose 400 percent.

The Center on Budget and Priorities reported that in 2005 incomes of the to 1% rose by $180,000 while middle-income households saw a $400 increase. Moreover, “the new data indicate that income is now more concentrated at the top than at any time since 1929” (emphasis added).

And I’ll place a big bet that income is more concentrated today than it was in 2005.

Obama made these points in his speech:

In the last few decades, the average income of the top 1 percent has gone up by more than 250 percent to $1.2 million per year. I’m not talking about millionaires, people who have a million dollars. I’m saying people who make a million dollars every single year. For the top one hundredth of 1 percent, the average income is now $27 million per year. The typical CEO who used to earn about 30 times more than his or her worker now earns 110 times more. And yet, over the last decade the incomes of most Americans have actually fallen by about 6 percent. (emphasis added)

But why is Obama finally talking about the yawning income/wealth gap? Because he’s trying to make it politically unpalatable for Republicans to balk at extending tax cuts for the middle-class:

[W]e need to extend a payroll tax cut that’s set to expire at the end of this month. (Applause.) If we don’t do that, 160 million Americans, including most of the people here, will see their taxes go up by an average of $1,000 starting in January and it would badly weaken our recovery. That’s the short term.

In the long term, we have to rethink our tax system more fundamentally. We have to ask ourselves: Do we want to make the investments we need in things like education and research and high-tech manufacturing — all those things that helped make us an economic superpower? Or do we want to keep in place the tax breaks for the wealthiest Americans in our country? Because we can’t afford to do both. That is not politics. That’s just math. (Laughter and applause.)

He’s right. But I’m not holding my breath — either for him to man up and actually do what he talks about or for Congress to get over its love affair with partisanship and think about flirting with statesmanship.

UPDATE: Here’s the video of Obama’s remarks: