Trickle-Down Economics Remains an Unsuccessful Approach

Trickle-down economics continues to get a lot of airplay in conservatively led states such as NC, which is unfortunate, as it has been proven to be an unsuccessful approach to economic growth. In a recent speech at the Center for American Progress, Maryland Gov. Martin O’Malley took aim at trickle-down economics — the conservative theory that fiscal policies benefiting upper earners will improve the whole economy and therefore also benefit the middle and lower classes. “Trickle-down economics has been an abject failure for 99% of Americans,” O’Malley said, according to prepared remarks. “If we want to deliver better results — if we want to strengthen our middle class and expand middle class opportunity — then we have to be willing to make better choices.”

As governor, O’Malley has a strong base of success to speak from. Yet, he does not stand alone in this opinion. The Congressional Research Service, the nonpartisan think tank for Congress, prepared a report on their analysis of the veracity of trickle-down economics and was to release it last fall. The report agrees with the assertion made by O’Malley above. The reason it did not get much airplay is Senator Mitch McConnell had the report buried before the election according to the New York Times.

Yet, a better source may be David Stockman who was budget director to President Reagan. Stockman claimed that trickle-down economics was a favored economic tradition, believing it would benefit the entire country over time. Of course, he did not say that everyone would benefit equally or adequately. Over time, many felt they had been left out of the promised glory. Today, Stockman has a different view from the one he had then. He is on record saying trickle down economics did not work and I have seen him say it.

Even going in Stockman should have read more history.The idea that trickle-down economics is good for the country was ridiculed by economist John Kenneth Galbraith and even FDR. They said that it had been tried in the past and failed. According to Galbraith, it was known as the “horse and sparrow theory.” He said that “If you feed the horse enough oats, some will pass through to the road for the sparrows” and  believed that this idea lead to an economic crisis referred to as the “Panic of 1896.”

Let’s not take Stockman and Galbraith’s retrospective insight by themselves. This belief is also echoed by Nobel Award winning economist Paul Krugman. And, you may want to check out Mehrun Etebari’s article published on June 17, 2003 entitled: “Trickle Down Economics: Four Reasons Why It Just Doesn’t Work.” His thesis is by any of four major measures – GDP growth, Income growth, Wage growth or Improvement in un-employment, trickle-down economics fails to deliver. Here is a link to the article: http://www.faireconomy.org/research/TrickleDown.html.

Two closing thoughts. First, the best comment about trickle-down economics actually comes from one George H.W. Bush (which he borrowed from journalist Paul Harvey) when he was running against Ronald Reagan and before he became his Vice President. Bush referred to it as “Voodoo Economics.” Harvey and Bush were correct.

Second, if people are looking for an economic theory that does promote growth, look to Keynesian economics. People refer to stimulating the economy through government investment as strictly Keynesian economics. The Obama Stimulus was Keynesian economics and unlike what has been drummed into an electorate by the GOP last year, the “Failed Stimulus” actually worked. Who says so? Six economic organizations do – Macroeconomics Advisors, Moody’s Economy.com, IHS Global Insight, JP Morgan Chase, Goldman Sachs and the Congressional Budget Office. They said it improved the economy and would have been even more successful if it was larger.

So, let’s sum up. The GOP is touting an economic approach – trickle-down economics that has been proven not to work.The only people who will benefit from reducing taxes on the rich are the rich. Keynesian economics has been proven to work including the Obama Stimulus plan, which the GOP was able to convince others it did not, even with evidence to the contrary. I think the Democrats need a better press agent.

Job Creation is Still Key

I must confess I am not surprised, but am disappointed in the failure of Congress to address the issue of job creation after spending so much time talking about it. To the President’s credit he has posed ideas to move things forward, but has not said this is mission one and we must do this. Our Congress can find ways to discuss every thing else under the sun, with the exception of what they need to discuss. The right seems so infatuated with not increasing the deficit, that they fail to consider needed investments in areas which could fuel growth. What does fuel growth?

According to Thomas Friedman and Michael Mandelbaum’s “That Used to Be Us: How American Fell Behind in the World it Invented and How It can Come Back” we have strayed from our model of public/ private partnership of investing in our infrastructure, innovative ideas and education. For some reason, the involvement of government investing in moving big ideas forward seems to have gotten lost. Our government has always invested in big infrastructure items like highways under Eisenhower, dams and highways under FDR and water resources under Teddy Roosevelt. But, it also has invested in tandem with venture capital and other investors on ideas that could be game changers. For a copy of the book, please link to: http://www.thomaslfriedman.com/bookshelf/that-used-to-be-us.

This thesis of investing in innovation is also echoed in David Smick’s book “The World is Curved” which plays off Friedman’s earlier best seller “The World is Flat.” What is interesting about Smick’s perspective is he was an economic advisor to two Presidents – Ronald Reagan and Bill Clinton, as well as Jack Kemp who ran unsuccessfully for President. He notes that America must invest in innovation to remain successful, as he notes innovation is portable. If the idea is created, protected and funded elsewhere, that is where the initial jobs will be created. For a copy of the book, please use the following link: http://theworldiscurved.com/. This is a key reason the Immigration Bill included keeping talent here in America as we need to keep our innovators.

One of the interesting observations that Smick makes in his book is how similar Reagan and Clinton were in a key area. They both opened up markets for US trade. When you look at the jobs created during various White Houses (note this gives too much credit to the President, but is an interesting exercise nonetheless), Bill Clinton’s tenure had the most non-farm jobs created than any other president – over 22.7 million, an average of 11.4 million jobs per four-year term (per the Bureau of Labor Statistics). The fourth best president result, per added non-farm jobs is Reagan at 16.1 million or 8.1 million jobs per term. What I found surprising is the second most jobs created per term was under JImmy Carter at 10.3 million. Lyndon Johnson came in third with 9.8 million jobs in his second term, building off a good combined result with JFK in his short first term ending JFK’s term after his assassination.

Our Republican friends will not appreciate this next statement, but if you look at the Bureau of Labor statistics and earlier data, the comparison of non-farm jobs created under Democratic White House tenures dwarfs the same result under GOP White House tenures. Again this gives too much credit (or blame) to the President, but since 1921, the twelve GOP terms have created 35.3 million which pales in comparison to the eleven Democratic terms which had 74.5 million jobs added. The average per term shows 6.8 million/ term for the Dems versus 2.9 million/ term for Reps. It means that the Democrats needed a better press agent. But, I do believe it goes deeper than that.

I believe Keynesian economics seems to have been embraced more by Democrats than the GOP, who are much more interested in trickle down economics. The Keynesian view follows some of what Smick and Friedman/ Mandelbaum are saying. Intentional spending creates jobs. If we Invest in infrastructure, jobs will be created that will fuel more spending. So, as we look at the deficits, they are important, but we need to be mindful of three things. First, we need judicious cutting of some expenditures. Second, we need increased spending in infrastructure, innovation and education investments. It is OK to borrow to build an asset, less so to pay for operations. You may have debt, but you do have an asset. Let’s build things – this latest bridge collapse was not a total surprise. Third, we do need more revenue. The Bush tax cuts which we continue today (except at the upper end which has helped bring down the deficit) took us from a surplus position to a deficit position and caused Bush to fire his Secretary of the Treasury Paul O’Neill when he openly was critical of this move.

It should be noted these three ideas are part of Simpson-Bowles plan and are behind some of the President’s budget recommendations. And, I do want to say to those folks that called his stimulus a failure did not read the conclusions of five reputable economic firms who said the stimulus actually worked, it was just not enough.

Our economy continues on its journey upward. The capital market are at a new peak doubling what they were when Obama started (a lot of GOPers should thank Obama and Bernanke), the housing market is recovering and jobs have been added for over three years. Yet, we need to build things. And, we have stuff like these bridges that need to be built. Congress please stop focusing on nonsense and focus on this issue. You said you would.