The Mechanics of Trickle Down Economics Explained

The great lie that was perpetrated on the American people was the "trickle down" economics of Ronald Reagan. Here is a bit of a post by Robert Reich that explains how that political policy has blown up:

Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.

It’s no coincidence that the last time income was this concentrated was in 1928. I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economic declines. The connection is more subtle.

The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.

What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.

Meanwhile, as the economy grows, the vast majority in the middle naturally want to live better. Their consequent spending fuels continued growth and creates enough jobs for almost everyone, at least for a time. But because this situation can’t be sustained, at some point — 1929 and 2008 offer ready examples — the bill comes due.

Go read the whole post by Reich. It will explain to you the mess that America is in. And Reich points out what is needed to fix the mess and the fact that Obama, the Democrats in power, and the cursed creators of the problem, the Republicans, are doing nothing to solve the problem:

This time around, policymakers had knowledge their counterparts didn’t have in 1929; they knew they could avoid immediate financial calamity by flooding the economy with money. But, paradoxically, averting another Great Depression-like calamity removed political pressure for more fundamental reform. We’re left instead with a long and seemingly endless Great Jobs Recession.

THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity. In the 1930s, the American economy was completely restructured. New Deal measures — Social Security, a 40-hour work week with time-and-a-half overtime, unemployment insurance, the right to form unions and bargain collectively, the minimum wage — leveled the playing field.

In the decades after World War II, legislation like the G.I. Bill, a vast expansion of public higher education and civil rights and voting rights laws further reduced economic inequality. Much of this was paid for with a 70 percent to 90 percent marginal income tax on the highest incomes. And as America’s middle class shared more of the economy’s gains, it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs.

By contrast, little has been done since 2008 to widen the circle of prosperity. Health-care reform is an important step forward but it’s not nearly enough.

So America is stuck. And the real tragedy is that the ultra-rich who caused the problem and whose political manipulations keep it going, are in fact their own worst enemies:

The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving. That’s the Labor Day lesson we learned decades ago; until we remember it again, we’ll be stuck in the Great Recession.

This is just another of the paradoxes of life. Just like the paradox of saving, i.e. an individual is better of in the Great Recession by cutting back spending to claw their way out of their debt but if everybody does this is causes the economy to shrink which only makes the hole bigger and so defeats the effort, what Reich is pointing to is a paradox of power, i.e. the rich would be better off letting the pie grow so that everybody -- rich included -- get a bigger piece, but at the level of the individual, if you are rich you will fight and claw to keep your piece big even it it stymies or shrinks the pie. The reason for government is to overcome these paradoxes by laying down a law which promotes the collective good when individual incentives viciously undermine the larger society.