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:

20 Comments

  1. What is most interesting to note, however, is how wrong the President is. There is a growing consensus that FDR, while popularly perceived as helping the economy with his New Deal, actually hindered the recovery. It was two UCLA Economists, at a school known for ascribing to a more Keynesian economic theory than a Chicagoan theory, who showed that Keynesianism fails, where the Chicago School works.

    The study that shows this can be found here.

  2. “growing consensus”

    Oh really? There have always been people seeking to discredit FDR – from the time he was in office all the way to the present. Color me unimpressed.

    Actually I’m more interested in the rightwing response to Teddy Roosevelt. Our friends to starboard don’t seem inclined to accept him as one of their own anymore. No real surprise there I guess.

    Great post Kathy. Trickle down has been a failure, but it retains it’s popularity in republican mythology. Well heck, who needs facts and history when you have ideology!

    I love the excerpt of Teddy quoting Lincoln. Too bad we don’t have leaders with vision and conviction like that today. And to think they were republicans!!! (definitely RINO’s by todays GOP “standards”)

  3. Our system of corporate communism will never allow a true “free” market. The extremely wealthy and powerful do not like economic risk and will do everything in their power to keep themselves in power and their serfs in pseudo-slavery.

    The argument over which economic theory is better is more an argument over how often it is best to whip your slaves.

    Conservatives say once a day in order to keep them in fear.
    Progressives say once a week, but tell them it is because you love them.

  4. Both Republicans and Democrats have been pushing two different flavors of the same Keynesian philosophy. That’s why Krugman and Cheney are both quick to defend the manipulations of the Fed.

    So yes, Republican Keynesianism fails horribly over the long term when it’s actually implemented — just like the Democrat version.

  5. I agree with Obama that the payroll tax cut should be continued, that income inequality is a problem, and that the approach to solving income equality should consider both short term and long term. Where I disagree with him is in defining income inequality as a tax problem.

    Lowering the payroll tax in the short run is reasonable, but instead of picturing the long term problem as a need to change tax rates the focus should be on identifying why income inequality is worsening and what can be done to correct it. This would be a reasonable time for a blue-ribbon commission, as much as I generally don’t care for them. The first step should be in identifying the root causes of the problem and suggesting possible remedies.

  6. He’ll be called a soci*list, commun**t and worse, but Obama is (again) correct.

    It takes a certain kind of blinder to see the world and economies as they exist today, and to proclaim that markets solve all of the problems (or even most of them, or even most efficiently were there no or much less regulation,) and to somehow not be able to observe that wealth plus political power distributes more of the same to fewer of the same. That Adam Smith “invisible hand” needs some major hand-washing, in my view. And it has been invisible to the advantage of the few for far too long.

  7. What we have seen over the last thirty years can hardly be called Keynesian economics. It can barely be called economics.

    We had a version of Keynesian economics in the post war period and it was certainly more successful than the last thirty years of neoclassical economics, which is more Milton Friedman free market lite than Keynesian.

    But name calling aside there can be no question about the following:

    Supply side theory doesn’t live up to the promises for it. Reducing wages and cutting their taxes to give more of the nation’s income to the wealthy to invest makes them substantially richer and hurts everyone else. It doesn’t increase capital investment. It doesn’t build more factories. It doesn’t increase employment. It does increase the gambling games that undermine the stability of the financial markets. Substantial amounts of the capital goes overseas. It does increase the nation’s debt.

    Incremental loosing of regulations, especially those covering the financial industry, has been a disaster. The economy has become much more unstable. How can anyone contemplate removing most of the regulations to arrive at the wet dream of a free market when the first steps have been so disastrous?

    There is no doubt that technological change and trade changes, globalization, have worked to favor capital over wages and to increase income inequality. That makes it even more insane that we enact policies that do the same.

    We did much better when we had a balanced set of policies to divide the gains of the economy between capital and wages rather than this extremist idea of capital takes almost all.

  8. My previous comment was directed to Professor Elwood. I type so slowly that it is not obvious.

    But to DaGoat: … Where I disagree with him (Obama) is in defining income inequality as a tax problem.

    Taxes are certainly not the whole problem but they are part of it. Taxes are collected to pay for the things that the profit seeking market either doesn’t do at all or doesn’t do well. Among the things the market economy doesn’t do is provide for losers in the operation of the economy. These include the unemployed which are required by the market to keep wages down. These include the children of the poor. These include the feeble in body and mind, unable to work. Increasingly these include the people who the private enterprise concerns have slowly stopped providing for, the sick and the elderly.

    Spending this money from taxes does flatten the distribution of income. (Of course, other tax money spending does the opposite, for example, spending money on defense procurement, which goes to capital intensive industries.) So yes, giving tax cuts does increase income inequality. Especially when you give the tax cuts overwhelmingly, as we have, to the rich, the high income earners who are already profiting from the changes in the economy and increasing taxes on the poor and middle class, the payroll and sales taxes.

  9. There is a lot about libertarians that I admire. The overwhelming problem that I see with that platform is exactly what merkin suggests above.

    It was telling how Ron Paul paused during his campaign question about the hypothetical individual who chose not to buy health care coverage, who ended up critically ill and was unable to pay for his care. Aside from the applauding audience when he referred to the “freedom” issue, I felt it represented the live-and-let-die simplicity of that political philosophy pretty well. Human neighborly charity is great but to rely on it to sustain that population that merkin refers to is an ?interesting proposal.

    It may be an oversimplification to suggest that tax policy can “fix” anything, but it’s a stretch to imagine that our current tax situation is tenable.

    We’re the wealthiest nation in the history of nations, our government is flat broke, and 20% of our population owns 85% of the wealth in this nation. What’s up with that?

  10. Again I ask the simple question. Taxes only come due when profits are made, and profits are made only when demand for goods and services are found in the market. No demand, no profits; no profits, no taxes. This is the first correlate of economics.

    A second correlate is that regulations produce an expense for business, and the results of regulation are fair labor laws, safe food and drug laws, and restriction of fraud in the market. The call to reduce regulations as a means of increasing profits is dangerous to the public welfare.

    I think the elite would be the first to call for regs if it was found that 100 proof, 50 year bottle of scotch was suddenly found to be 10 years old and 50 proof.
    You get what you pay for only when someone is checking the truth of the product.

  11. “You get what you pay for only when someone is checking the truth of the product.”

    Yes, exactly. Furthermore, you only get workers paid a living wage and given safe work conditions when someone is checking that that is happening too. Same with product safety, as you mentioned. The libertarian ideal of the benevolent titan of industry is basically BS. They might be smarter at gaming the system than others who are less successful, and there will always be the rare exception, but pretending industrial leaders have anything but their bottom line on their minds is folly.

    I find it pretty sad — although it rings true — that your scotch example would likely be more persuasive to many than unsafe work environment examples.

  12. Actually, the non-libertarian ideal is that of benevolent, or at least accountable, politicians, which seems laughable on the surface. Nor are libertarians against all regulation. For that matter, current regulations are just as likely to protect the industry from the consumer, as to protect the consumer from the industry.

    What we do want is accountability with power, and responsibility with freedom. The agencies that have replaced laws are a great way to put industries in charge of their own regulations — which is why they’ve been able to avoid any accountability at all. It’s been much more obvious in the financial sector because of their (government backed) power to legally leverage their assets, which also means leveraging risks.

  13. Actually, it’s not at all laughable — or wouldn’t be if there were some laws existing and being enforced against politicians being paid to vote certain ways.

    There should be natural tension between government and industry. Right now, it’s government and industry in a giant circle (ahem) to make themselves rich and happy. Industry gets to do whatever it wants with little outside interference by bribing politicians to fix the rules. I honestly don’t know where you get the idea that the solution to this problem is taking out the “bribing the pols” stage and skipping straight to the “industry gets to do whatever it wants with little outside interference” stage. The natural solution, of course, is to make sure the bribing isn’t happening.

    (I don’t want hear the deflection that they’ll do it anyway. If making and enforcing laws has zero effect on any behavior, we might as well empty the prisons, burn the cities to the ground and hope you have friends with guns and full food stores.)

  14. Didn’t David Stockman, Reagan’s budget guru admit that trickle-down Reaganomics was a hoax for allowing the already wealthy to amass even more wealth? In theory the money is supposed to trickle down, but in reality it just encourages unlimited greed.

  15. Yes, unlimited bribing is as much a problem in lawmaking as it is in court cases, as we’ve agreed before. If you want to strike at that root, I’d be more than happy to help. In the meantime, what passes for regulation today is all-too-often the exact opposite, or a distraction at best, of dealing with the problem, and often interferes with civil suits, which are the best defense against corruption. The SEC, which has been caught destroying evidence, but no one can touch for doing so, is a prime example.

    Until the politics are fixed, I see no reason to keep testing the limits of how crony it can get.

  16. “I find it pretty sad — although it rings true — that your scotch example would likely be more persuasive to many than unsafe work environment examples.” – roro

    Amen sister. Amen!

  17. This would be a reasonable time for a blue-ribbon commission, as much as I generally don’t care for them. The first step should be in identifying the root causes of the problem and suggesting possible remedies. dagoat

    Actually we don’t need the blue ribbon commission as the work has already been done. http://growth.newamerica.net/s.....bini_0.pdf

    As for what has caused the inequality of income and wealth to grow:

    We have ‘free trade’ agreements with (among others) Canada and Mexico. Where are all the Mexican and Canadian doctors, lawyers, druggists, etc.? Our free trade agreements allow free trade only in manufactured goods. Those goods are disproportionately made (formerly) by middle class, non-college educated workers. Those jobs have gone overseas and to Mexico because workers in those countries can do the labor and cost less. The jobs that would put one in the wealthier classes (Doctors, etc.) are forbidden to all but a few foreigners. The United States keeps close tabs on professionals entering the US workforce.

    If the jobs that made the middle class strong are going away, we need to get people prepared to work in jobs that would replace those. The jobs that support a middle class today tend to require (or at least it helps) college (or at minimum, post high school) education. One fairly reasonable proposal would be to extend our educational opportunities to all US citizens.

    We already provide education through Grade 12. Why not provide it through Grade 16? I’m not suggesting that continuing be mandatory, but then going to Grade 12 isn’t mandatory for the participants either. America became economically powerful because we started investing in our people. High School education became the norm. Well, now it appears that most middle class jobs need more. So, invest in more.

  18. I think the elite would be the first to call for regs if it was found that 100 proof, 50 year bottle of scotch was suddenly found to be 10 years old and 50 proof.
    You get what you pay for only when someone is checking the truth of the product.

    Big companies don’t really care about regulation and taxes all that much. More regulation just makes it harder for anyone to start up a buisness that competes and taxes they just pass along. Heck big corps sometimes lobby for more regs to push cometition down. It’s not just one thing or another.

  19. @Rcoutme
    Your link has a very good analysis of the problem (acknowledging that this is a debt-deflation bubble, which is resistant to the normal strategies), but the solution shows an innate trust of the financial and political systems that got us here.

  20. Perhaps, but we’ve got to start somewhere. Even if one does not trust politicians to do good things for the country, the solutions that will work need to be tried.

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