Supply-side’s abject failure

In a speech Tuesday, President Obama issued a damning critique of trickle down economics and a stark defense of social insurance and public investments funded by progressive taxation. The president’s speech in Osawatomie, Kan., addressed the challenges of rebuilding the middle class and tempering income inequality, making the case that doubling down on the supply-side experiment of the last decade will fail the needs of the vast majority.

The president aptly characterized conservative economic policy as a two-pronged approach of cutting regulations and cutting taxes for the wealthy. (Note conservatives’ glaring lack of enthusiasm for refundable tax cuts or even an across-the-board payroll tax cut – tax cuts that would be pretty broad-based.) This is, of course, exactly the economic nostrum being preached by the GOP presidential field and Republican leadership on Capitol Hill. See, for instance, how the tax plans of presidential candidate Rick Perry or House Budget Committee Chairman Paul Ryan (R-Wisc.) belie any concern about income inequality, or how regulatory uncertainty is used as a phony explanation for the jobs crisis.

This supply-side snake oil is peddled on the premise that when the wealthy do well, income gains trickle down to the middle class and everyone benefits from a growing economy. But that hasn’t happened—real median income has sharply decoupled from productivity gains in recent decades (particularly since 2000) and income gains have been incredibly concentrated at the top of the earnings distribution. The president made the following salient point on the supply-side experiment:

“Now, it’s a simple theory… And that theory fits well on a bumper sticker. But here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible post-war booms of the ‘50s and ‘60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.” (Emphasis added.)

The record of the Bush-era tax cuts, also invoked by the president, indeed speaks volumes: “Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century.” That and the slowest economic growth, non-residential fixed investment growth, compensation growth, and wage and salary growth. Imagine if we had instead used the $2.6 trillion these tax cuts added to the public debt over 2001-2010 to undertake investments in areas like education, infrastructure, and scientific research—investments that would have produced much better job-growth and that have actually demonstrated high economic returns.

President Obama's speech in Kansas likely resonated with middle-class Americans.

Since the 2001 and 2003 tax cuts didn’t generate much in the way of jobs or incomes, they failed (by miles – or should we say trillions of dollars) to fulfill the mendacious claim often made by conservatives that tax cuts pay for themselves. (Note that this assertion continues to surface despite being flatly rejected by the Bush administration’s own economists.)

Based on this abject policy failure and the clear dysfunction of a tax code that allows a quarter of millionaires to pay lower effective tax rates than middle class families, President Obama made the case for tax reform – including allowing the top individual income tax rate to revert from 35 percent to the 39.6 percent rate implemented by President Clinton (which would still be well below tax rates for most of the post-World War II era).

Since most Republicans will clearly scream about the onerousness of this proposal, it’s worth noting that the optimal taxation literature calls for a steeper schedule of marginal tax rates and a considerably higher top rate than 39.6 percent. In their recent paper on the case for progressive taxation, economists Peter Diamond and Emmanuel Saez peg the optimal top income tax rate at 73 percent, up from 42.5 percent today (taking into account Medicare payroll taxes and average state income and sales taxes). This would imply a top federal marginal income tax rate of 65.5 percent—more than 25 percentage points higher than that proposed by the president. The current top tax rate is “is optimal only if the marginal consumption of very high income earners is highly valued,” note Diamond and Saez.

Of course, the value that policymakers put on the happiness of the very rich is exactly what stands behind the failure to enact job creation measures that would be financed by a surtax on millionaires and the repeated collapse of long-term deficit reduction negotiations because of conservative intransigence over raising more revenue from upper-income households.

I applaud the president for making the case for the progressive alternative against regressive tax cuts as the lodestar of economic policy. America’s low- and moderate income families should, too. As a nation, we cannot afford to double down on the failed, plutocratic pipe dream that is trickle down economics. Another round of tax cuts for the highest-income households will not restore full employment but will exacerbate widening income inequality, blow a bigger hole in the budget deficit, and defund needed public investments and economic security programs. Any policymaker genuinely concerned with the fate of the middle class, inequality and immobility, or the budget deficit, should be focused on rolling back the last round of inequitable and ineffective tax cuts rather than digging us deeper and deeper into a new Gilded Age.


  • Doubler22
  • Doubler22
  • Jeff

    I just stumbled onto this website.  What is EPI?  It should be obvious to everyone by now that the truth is the opposite of whatever this guy Obama says.

    • wolfy

      Word!

  • Anonymous

    Great article.  The more investigation of the gigantic ripoff that is “supply side economics” the better.  It has never worked, ever.

  • Zehnhund25

    I’m not sure how you have come to an opinion so utterly opposite the facts. It hardly takes an MBA or Phd in economics to Google “Tax Cuts and Government Revenue” to find that every source of facts and figures, even from the government itself, tell of reality being quite different from your progressive fairytale.
    Every study done on the three major tax cuts of the 20th century PROVE that at least those tax cuts INCREASED government revenue! This is NOT open for debate! IT IS FACT!!
    Now. That should not denote that tax cuts are a magic bullet and the Republicans know they are often using them as a placebo rather than a legitimate medicine for just the same reason that medicinal placebos are used instead of real medicine. It’s a feel-good move. True enough that like under Bush Jr it was sufficient to have a real and positive impact on the economy, another fact not up for debate, but also covering the other actions taken under Bush that were entirely not or the entirely opposite of positive.
    The people are the power in our economic AND government systems and it has and always will be that empowering the people, NOT the government, will be the solution to this problem. The people includes the rich whether they make $250,000 a year or $2,000,000.
    YES there are many areas where slight to moderate changes have put those not in the 1% at increasing disadvantage. This has been accomplished by the collusion of those rich and those now professing, as always, singular concern for the very people they have acted to harm.
    To believe the opposite of known reality is the definition of delusion. For it to be expressed by one writong on an economic website is disturbing acceptance of delusion.
    Our free-market, trickle-down economic system is sound as it is as natural a system as man can devise. It is the operators of the system that all systems of man require, meaning man himself, that is the problem.
    On a final note, not once in our history over the last nearly two hundred years has any other economic and-or government system been able to out perform ours in strength nor stability by any measure. The most powerful nemesis we ever had, other than the British Empire, was not able to sustain an economic competition one on one with us.
    We need to reestablish control over the operators, leve the playing field by eliminating that which allows subversion of the rules and move on.

  • Williambennett01

    Where is some of the blame for Clinton, he opened the door with China in the free trade agreement and look at all the businesses that have moved out of the US.  Furthermore, we are unable to compete with China because they allow such low wages and gross employment conditions that kill any opportunity for an American company to compete.  Wal-Mart is a good example; almost nothing is made in America, it all comes from China.  I wonder how much revenue we loose off that? I have yet to get a job from a poor person, it is the wealthy that take the risk and start businesses and employ people.

  • http://www.facebook.com/boris.babakov Boris Babakov

    The author, Andrew Fieldhouse, shows an incredible lack of insight into both the current status of the Social Security system and the disincentives produced by many social programs that are supposed to offer temporary relief. “Free” money offered to the public create more dependents. The more money made available to people living at the lowest level of the economic ladder, the more people near that limit will lose any incentive to work. Why perform a job at $10/hour when you can stay home and collect benefits worth $10/hour or more? And yet, that $10 per hour employee is an important part of our total economy from a productivity standpoint. As far as the Social Security tax cut goes, you will have to re-write the entire Social Security history to justify the shifting of taxes out of paychecks as it now stands. Social Security is supported by “premiums” as are all other insurance programs. It was designed that way and was sold to the American Public as such by FDR. He didn’t skew the costs by artificially charging more for some than others. Open the entire system to restructuring if that is what we need, but stop crying foul when the benefits are reduced to most future recipients. Everyone is equally eligible according to past earnings. Don’t blame the republicans, blame FDR.

  • http://pulse.yahoo.com/_XX5TH5GKHUPHKMAQT5S7GAAR2E JC

    Those commenting are skirting the issues, per usual and in accordance with conservative thought.   According to the rationale of Babakov, any job, paying any amount of wages, is justified because “that employee is an important part of our total economy.”  The reality is that it takes a certain amount of money to live.  Any business who is hiring employees but fails to pay the amount necessary for that employee to live, is being subsidized by the government when that employee has to rely on government programs to exist.  In a pure capitalistic society, without government programs, that business would be considered a failure and would be allowed to fail.  I’m not against supporting business, but I’m sick and tired of the individual worker being portrayed as the recipient of government largesse when oftentimes in reality, the government is supporting inadequate pay by private business.   Then on to Zehn.  Look more closely at your facts.   There are as many studies (more amply supported) that indicate that tax cuts do not increase revenue.  The most thorough show that tax cuts from a very high rate to a lower rate, (ie 90% to 70% for example) increases revenue, but a reduction from an already low rate to a lower rate does not.  The repetitive robotic rhetoric from the right has no merit.  It’s time we move on.