A Refutation of Reagan’s Supply Side Economics – What Trickle Down?

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The best lack all conviction, while the worst
Are full of passionate intensity.

From William Butler Yeats’, The Second Coming

 

Besides not wanting to completely waste a Masters Degree in English I thought Yeats’ poem, written about the excesses of the 1920s, seemed apropos of our current situation. The economy is falling apart and the Democrats can’t seem to agree on anything while the Republicans are full of passionate intensity against everything anybody wants to try.

During the roaring ‘20s Robber Barons amassed huge fortunes and the disparity in income between the top 1% and the middle incomes grew to 24:1. The crash of ‘29 followed by the New Deal, bank regulation, tax reform and finally WWII’s GI bill evened out the wealth spread to about 8:1 where it remained until 1980. That’s when Ronald Reagan was elected and we began 30 years of supply side economics, aka trickle down, and that’s what has us where we are today.

Since 1979 the average income of the top 1% has increased more than 256%, from $337k to $1.2 mil, while the middle one fifth of incomes has increased 21% from $43k to $52k. CEOs and other top executives now receive a third of all payroll dollars in the U.S. and that does not include stock options or other non-payroll incentives. Income disparity is now at 23:1. All of this was achieved through the tax code and de-regulation and while it was happening the national debt swelled from less than $900 billion to over $10 trillion. As a percentage of GDP the debt is as high as it has been since the Korean War and may reach WWII proportions before it’s over.

When Reagan took office the top marginal tax rate for earned income was 50% (above $215k) and 70% on unearned income. The current highest marginal rate for earned income is now 35% (above $311k, up from a low of 28% above $39k) and unearned income is taxed at 15%. The last time marginal taxes were this low was just before the 1929 crash. The highest marginal rate since then was 91% on income above $5 mil in the mid ‘50s.

During the years with the highest marginal tax rates the growth in GDP averaged 5%, since Reagan began cutting taxes it has averaged 2.5%. Two things caused this: the conversion of our economy from manufacturing to a service economy (outsourcing of jobs) which in turn shifted GDP from a manufacturing base to a consumer spending base and the concentration of wealth in a few hands resulting in less money for consumers to spend.

In addition to concentrating wealth in the hands of a very few, the huge increase in executive compensation is sapping the Social Security trust fund. As more and more wages are concentrated in fewer and fewer paychecks less of it is subject to Social security taxes. Since 1982 the percentage of wages subject to Social Security taxes has declined from 90% to 83%.

If the United States is to remain a world power I believe we must do two things: shift the GDP back to a more balanced service vs manufacturing base and fund the government through a much more progressive tax system. It is too late to bring the Levi Jeans manufacturing back to the United States (it was in Waco, TX back in 1980) because the price of that product has been set to Chinese levels. However, as we did in the ‘60s, as we create new technology we can keep those manufacturing jobs here through changes in the tax code to make it less profitable to ship those jobs off shore and we can create a level playing field by requiring foreign trade partners to meet the same environmental and human rights standards US companies must. Strengthening the manufacturing sector will create high paying jobs raising the wages of the middle-income earners. If the burden of funding the government is shifted to the few top earners the large number of people in the middle incomes will have more to spend, stimulating the service sector of our economy.

In short, we need to go back to the future . . .

• income disparity 1929
• income disparity 79 vs 06
• executives get 1/3 of all wages
• Pay of Top Earners Erodes Social Security