Trickle-Down Economics is Officially a Hoax!

Trickle-down economics is officially a hoax. You might also know it as Voo-Doo Economics. The idea that you can just give massive tax breaks to the wealthy and because they create all value and job opportunities, it “trickle” down to the rest of the economy. Sounds like a law of nature or something, doesn’t it? This concept was first mentioned by Reagan as he completely dismantled the tax code that led to the most prosperous time in American history. It wasn’t only Reagan who was all in on helping the ultra-wealthy, the Democrats helped him pass it. We saw this same logic tested in the Bush Administration with tax cuts for the wealthy and with the lowering of the capital gains tax. One can picture these Republican ‘Noah’s’ parting the seas of hard work and adversity for these trustafarians. Get daddy’s money tax-free, throw it in the market, and watch it grow! If only there were literally zero taxes these rich people could own the majority of the wealth indefinitely in the exact manner of royalty in the old world. Oh wait, many of them, like Bezos, don’t pay any taxes already! Turns out a 50-year study of tax cuts for the wealthy revealed a shocking discovery, they never trickle-down. 

Ok, let’s not act like this was the most obvious thing ever, we still have politicians pushing it on the American public today with the Trump tax cuts. There is some logic to the argument that the wealthy are employers or owners. So in theory you could take a leap without looking closely that if you gave those employers more money, they will hire more workers and spend more money. This is why it is just a theory and not a factual idea, rich people do not spend the extra money like a normal person. For a working-class person struggling to make ends meet, they can think of countless ways to spend the money immediately. To the non-wealthy group of Americans, the trickle-down logic kind of makes sense because we know we would spend the money, boosting the economy, so it makes sense a rich person could do that at a more impactful rate. However the ultra-wealthy live life utterly alien to ours. They aren’t worried about making ends meet, they are just trying to save and grow their fortune. Plus if your house is paid for, you have every material thing you could want with no debt, getting $1,000,000 more won’t spur a spending spree. It’s pennies in the pile. Let’s take the $1,200 stimulus check, picture someone who makes $500,000/year as a software engineer(not even a billionaire), and then someone making $40,000/year as a server who lost their job during COVID, who do you think spent their money quicker? This is where theory butts into reality or something called the velocity of money, you check it out in-depth here. It doesn’t take a scientist to understand that the more impoverished you are the faster you would spend a stimulus check, this is the classic hierarchy of needs. 

So at its core we know the wealthy will not blow the money they are given on local businesses, what about business owners? Won’t they have more money to employ people? This again seems logical, we all seem to know a small/local business owner that we hear talking about how tough the system is on them. However, the people lobbying for these tax cuts aren’t small business owners that you know. These are large corporations, like Comcast, Amazon, Goldman Sachs, the list could go on all night. So if these large companies provide so many benefits to American society how many people did they hire after the Trump tax cuts? Well AT&T laid off a record number of employees after the tax cut to secure enough cash to purchase Time Warner, making a move away from technician services to streaming. Yet this is not AT&T’s fault, these companies do not have brains of their own sickened by greed. AT&T is forced by shareholder expectations and competition to always make more money the next quarter than you did the last. If you are the CEO and your sole purpose is to be more profitable every quarter, naturally you are going to hire the absolute minimum amount of employees to get the job done. Then imagine that Comcast comes up with some new logistical product that allows them to do installs with half the human technicians as AT&T allowing them to drop their prices. AT&T will have to cut the same amount of workers or go out of business. Pair this with automation and we have drag race to the bottom, who can be the first company with no employees, all profit. We are already seeing this today with the business model of the future, Gig-workers. They aren’t employees, you just get to absorb the majority of their production value with zero risks, a capitalist wet dream. 

So if you are some kind of billionaire that actually wants the system to flourish and see your businesses explode, what would work better than tax cuts and keep the workers satisfied? Direct all of these government programs currently going to the ultra-wealthy(Elon Musk), to your customers. See this is their big mistake, workers are the primary consumers. The healthiest economies see a wide array of people with spending power. Perhaps we should propose trick-up economics? 

This is why programs like Medicare for All would be an immediate boon to the economy. Millions of Americans would spend an additional $300-$1600/month in the economy instead of it sitting stagnant in the accounts of billionaires. Perhaps it is time to rethink our priorities.

Studying Ronald Reagan Part 2 – Death of the Union

In part one we dove into “trickle-down” or supply side economics. Now let’s look at another one of Reagan’s biggest “accomplishments” – destroying organized labor. Since 1979 the percent of Americans with collective bargaining(unionization) has dropped from 27% to 11.6% of workers. The end result being the loss of $200 billion per year in potential wages earned. And it doesn’t take Sherlock Holmes to realize that the owners of the business keep any profit not paid to workers in wages. 

Why were unions so important? Let’s rewind in history, to the late 1800’s, America is becoming an industrialized nation and workers are moving from farms to factories. For the first time Americans start having a boss and being employees. We all know what the working conditions were like- child labor, 7-day work week, 12 hour shifts. It is safe to say workers’ lives were at an all time low in American history. Inequality soared until 1929 when the great depression hit, bringing the times of grandeur to an end. In 1935 FDR passed the National Labor Relations Act or the Wagner Act. The act “guarantees the right of private sector employees to organize into trade unions, engage in collective bargaining, and take collective action such as strikes.” Imagine it being literally illegal to organize or strike? That was the hostile scene before unions. 

It is much easier to see the exact reasons for unionization when we rewind back to those hostile conditions. However, if we have any chance of decreasing inequality today, it will be through unions. One of the most important defenses a union provides is education discrimination. Discrimination is a strong word there, but we mean paying two people different wages for the same job simply because one has a higher education. This can be extremely painful to hear as so many millennials have gone to college and accumulated debt in an attempt to make a better life. The key here though is different pay for the same work, if we look from the employers perspective this is just a tool to pay less wages. Paying a few employees a higher rate will always be cheaper than a company wide raise. 

If we look around, tech jobs are the marquee careers of the day, while the former manufacturing jobs that built the middle class are either overseas or done by technology. We are losing all of the decent paying jobs that do not require a college education. Today if a millennial does not go to college, they are going to be working the same jobs they had in high school, competing with teenagers. Next time you enter a fast food restaurant count how many adults you see that are over the age of 30. This in no way knocking those individuals, the working poor are the most mistreated group in this country. The brutal truth is we have hard working adults making $7.25/hour. That is a starvation wage, you could not pay rent in any major city working full time at $7.25/hour, if you can it is at the cost of having food, utilities, or gas money. These are parents and grandparents working for $7.25/hour, do their children not have the right to a decent standard of living? 

Let’s back up and learn more about how we got here. It is hard to pinpoint one action that Reagan took to hurt unions, however his first union battle was the most symbolic. In 1981 Reagan went to task with  the Professional Air Traffic Controllers Organization. Shockingly this union actually endorsed Reagan. Little did PATCO know that the strike was going to effectively cripple unions for the foreseeable future. Since they were a Government agency, Reagan fired all of them immediately. 

This flipped labor ownership relations completely on their head. Historically strikes were used in the private sector as an effective bargaining tool to negotiate higher wages. Reagan himself once lead a strike as the union president of the Screen Actors Guild. However, this blow devastated all unions and gave the green light to business owners that they could mistreat unions and workers. And they were able to do so because Reagan staffed the National Labor Relations Board, effectively neutralizing all enforcement of labor laws. 

We will dissect why unions are important soon, in the meantime this chart tells the story succinctly. 

Reagan firing the PATCO union members was one of the greatest blows to the working class by any President. This real and symbolic gesture opened the floodgates for states to start cracking down on unions. Any manufacturing jobs left in America have left the Midwest for the south. Why? Because these states have the most anti-worker laws in the country, known as “right-to-work” states. Basically working is a privilege and not a right, and the employer maintains the right to fire you at anytime for anything, including organizing. Sadly if we cracked down on these laws, those manufacturing jobs would move overseas. If only workers everywhere had unions.

Studying Ronald Reagan: Part 1 Voo-Doo Economics

Have you ever heard the phrase trickle-down economics? The term gained popularity when Ronald Reagan passed his massive tax cuts to the wealthy in 1981. While the term trickle-down was used by the enemy of that agenda, the right referred to it as supply-side economics. No matter the term the primary idea was that the wealthiest in society create all the jobs, therefore if you give them the money it will “trickle-down” to all members of society. So how did trickle-down economics pan out for us here in America? 

Before engaging in an argument that can be split a million ways about the “success” of the 80’s, let’s open the tool box and see how to dismantle this. Ah, Velocity of Money, that will do the trick. If we remember the velocity of money is the rate at which money changes hands. Later we will dive into why money changing hands is the core of an economy. It is known that someone making less than $50,000/year will spend 100-110% of any tax cut or stimulus given to them. It is also known that a wealthy person with millions of dollars will spend 0-30% of any tax cut or stimulus given. This is really easy to visualize, if you are barely scraping by, that stimulus could help you eat, pay bills, or cloth your children, of course you will spend it immediately. On the reverse side, image what a millionaire did with their $1200 stimulus check, they put it right into their bank. That money won’t see the light of day, or should I say the light of the American Economy again. 

This is one of the major reasons we see massive inequality start to take hold during and after the Reagan Era. Once the wealthy got that chunk of the economy they have no incentive to give it back.

Income Gains Widely Shared in Early Postwar Decades - But Not Since Then

Notice on this chart from the Center on Budget and Policy when those lines really started to separate – 1981. Reagan didn’t change this chart with tax cuts alone, he also completely annihilated unions and any laws protecting workers. 

Let’s dive into his actual tax cuts.

The first tax cut (The Economic Recovery Tax Act of 1981) among other things, cut the highest Personal Income Tax rate from 70% to 50% and the lowest from 14% to 11% and decreased the highest Capital Gains Tax rate from 28% to 20%.

The second tax cut (The Tax Reform Act of 1986) among other things, cut the highest Personal Income Tax rate from 50% to 38.5% but decreasing to 28% in the following years [2] and increased the highest Capital Gains Tax rate from 20% to 28%.

If you caught our tax piece on how the wealthy avoid taxes, your ears probably perked up when you noticed that Reagan first cut the Capital Gains tax, Bush then followed in his footsteps dropping it back to the 20% we see today. This was one of the effective ways to let the wealthy pay far less taxes than workers. When we think about socialism for the wealthy after FDR, this is a prime example. Lobbying the government to change a law so that you make more money. That is socialism, a real competitor would earn it in the market. Funny how the wealthy “capitalist” seem to be so well versed in using the Government to enrich themselves. 

You might have also noticed that the top Marginal Tax rate was 70% before Reagan and 28% after Reagan. That is a radical change. This is the beginning of the extreme wealthy and aristocracy of families like the Walton’s. Imagine owning the bakery, butcher shop, toy store, electronics store, mechanic shop, pharmacy, and garden center in every town in America, then only having to pay a maximum tax rate of 28%. And that is the worst case scenario, they typically avoid all taxation as we have just seen with President Trump paying $750 in taxes in 2016. So the Walton’s and Jeff Bezos are funneling money out of every small town and large city in America, with a majority of the wealth never returning to the system. Think of the economy as a bathtub, the wealthy are putting massive holes in our tub and no one is making them add some water back. With the Reagan tax codes they could drain money from the rest of the country at a rate never seen in America.