Trickle-down economics "is the view that to benefit the wealthy is to benefit the middle classes and even the poor. Essentially, high taxes prevent upper-income taxpayers from spending and investing. By freeing them from high tax rates, their expenditures will have a "trickle-down" effect that will benefit lower income earners. However, Republican economic policies have demonstrated trickle-down economics offer no revolutionary effect.
Instead, the resulting wage, investment and job growth is on par or below levels associated with an economy that uses higher-marginal tax rates on upper-income earners.
First, note that this argument assumes the top income earners have a disproportionate amount of national wealth. Why else is it necessary to free this trapped money? In short, trickle down confirms the wealthy have a disproportionate amount of assets.
More importantly, Bush has cut taxes twice arguing they would provide all sorts of benefits for the economy as a whole.
What is the result?
Comparable Growth in Investment Spending
OK - corporations and individuals have more money. They must be investing that in the US to make us more productive, right?
Wrong. (All of these statistics are from the Bureau of Economic Analysis GDP reports). During the 1990s, the median level of total investment spending as a percent of GDP in the US was 15.97%. During the 2000s, the total is 15.91% -- a statistically insignificant difference. What is interesting is the median amount of non-residential investment spending was higher in the 1990s coming in at 11.18%, whereas that number is 10.45% for the 2000 expansion. In other words, nonresidential investment is less in the 2000s when pro-investment policies should have spurred higher investment spending. Investment spending in residential assets is a full percentage point higher in the 2000s, coming in at 5.28% versus 4.22% in the 1990s.
So, there is no evidence that supply-side tax cuts spur a statistically meaningful increase in total domestic investment. In fact, nonresidential investment spending is lower so far for this expansion, repudiating the idea that supply-side tax cuts increase investment spending.
Corporate gains trickle down in the form of higher wages
Wage growth for this expansion is terrible. First, corporations are doing quite well. According to the Federal Reserve's Flow of Funds report, corporations have increased their percentage of national income from 8.54%in 2001 to 13.88% in the first quarter of 2006. They are also the only economic sector in increase their savings rate, which was increased from in $192.3 billion 2001 to $606.3 billion in the first quarter of 2005.
However, this has not led to meaningful increases in wages. According to the Bureau of Labor Statistics, the average hourly wage of production workers was $14.70 in November 2001 and $16.61 in April 2006 for an increase of 13%. Over the same period, the overall inflation index increased from 177.4 to 201.5 for an increase of 13.58%. This makes the inflation-adjusted wages for production workers -.5% for this expansion.
The Census Bureau noted this trend here, and the Federal Reserve has also noted this declining trend:
The change in real before-tax family income between 2001-2004 stands in strong contrast to the change for the preceding three-year period. Over the more recent period [2001-2004], median income rose 1.6%, while the mean fell 2.3%. Over the preceding three-year period, the median had increased 9.5% and the mean had increased 17.3%. The change over the 01-04 period was strongly influenced by a 6.2% decline in the overall median amount of wages measures in the survey and a 3.6% decline in the mean; wages represent the largest share of family income. Investment related incomes also declined
Compare this wage growth with what occurred in the 1990s which had higher marginal tax rates on the upper-income levels:
According to the Bureau of Labor Statistics, the hourly pay for non-supervisory workers increased from $10.63 in January of 1993 to $14.26 in December 2000 for an increase of 34.14%. Over the same period, the inflation measure increased from 138.1 to 174 for an increase of 25.99%. Therefore, the inflation adjusted hourly wage increased 8.15%.
The Federal Reserve's Survey of Consumer Finances for 1998, confirms the trend:
In the 1998 survey, inflation-adjusted mean and median family incomes continued the upward trend between the 1992 and 1995 surveys; they also surpassed the levels observed in the 1989 survey toward the end of the previous expansion....
From 1995 to 1998, the proportion of families with incomes of $50,000 or more rose from one-fifth to 33.8%, while the proportion with incomes below $10,000 fell about one-sixth to 12.6%.
And from the
2001 survey:
Between 1998 and 2001, inflation-adjusted family incomes rose notably faster than they did in the 1995-98 period. The median rose 9.6% percent (2.5 percent during the 1995-98 period) and the mean rose 17.4% (12.2 during the 1995-98 period).
During the 1990s, the median family income increased from 27,900 in 1992 to 32.7 thousand in 1995, 33,400 in 1998 and 39,900 in 2001. Over the same period inflation increased 28%, making the total inflation adjusted gain 15%. Average income increased from $44,000 in 1992, to $47,500 in 1995, to $53,100 in 1998 to $68,000 in 2001 for an inflation adjusted increase of 23%.
Weak Job Growth
According to the national Bureau of Economic Research, this expansion started in November 2001 - not 2003 as the Bush spin team continually asserts in their employment reports. There were 130,883,000 jobs in the US in November 2001 and 135,106,000 in May 2006 for a total gain of 4,223,000. That's a compound annual growth rate of .70% -- and a full 1 million jobs less than the Bush administration's public claims.
The second weakest compound rate of establishment growth occurred in the 1990s, whose compound growth rate was 1.8% -- 2.5 times higher than the "Bush job machine."
In short - the bounty of jobs has not happened either.
GDP Growth
The US's median GDP growth for the 1990s was 3.7%. For this expansion, the median GDP growth is 3.1% for 2002-2005 and 3.5% for 2003-2005. Any way you measure it, total GDP growth in a supply-side economic years is comparable to non-supply side growth.
Tax policy is difficult and complex. History has twice demonstrated (once with Reagan, once with Bush) that simple slogans that help Republicans get elected don't provide a panacea of cures for what Republicans claim ails the country. In fact, the deficits created by these policies is more than enough reason to refute them as a policy option.
Now - this is not a call to a massive increase in taxes. However, it is a call to reexamine what has happened during this expansion to see if the benefits promised equal the results obtained.
Bonddad provides Economic Analysis for various Democratic Candidates with NRRSA