The much-worshipped cornerstone of Republican economic policy is the ‘trickledown theory’, religiously followed ever since the advent of Ronald Reagan. Put simply, the idea is that if the rich and the corporations are given tax cuts and various benefits they will stimulate the economy by investing their money, and hiring people so their wealth will trickle down to everyone else and ultimately increase employment and income.
Anyone who’s taken Econ 101 can debunk this so-called ‘theory’. The rich don’t actually behave this way; they have a very low Marginal Propensity to Consume (MPC) and much higher Marginal Propensity to Save (MPS). What that means is, when the rich get their tax cuts they put the money in the bank and never look at it again. That is because they have so much money that a tax cut does not really make much difference to them or their spending habits. They’re already spending on what they want. The same goes for corporations. This flawed theory drove Bush’s 2001 and 2003 tax cuts with disastrous results.
The GOP claimed that the tax cuts would boost economic growth. Simple facts prove otherwise. The average annual GDP growth was 2.5% under the Bush administration, significantly lower than the 4.0% it was under the Clinton administration. Unemployment worsened from 4.2% to 6.3% between 2001 and 2003. The poverty rate increased from 11.3% in 2000 to 12.7% in 2004. All of this happened following the tax cuts. In the longer term during 2001-2007 the job market had its weakest growth since 1945, household income growth was negative for the first time since 1967, African-Americans faced increased poverty levels, and women lost ground in the job market. We feel these consequences today.
Upward economic mobility in the US is the lowest of all the developed nations in the world, while income inequality is the highest. This also includes the dreaded “socialist” states of France, Sweden, Germany, Canada, Norway, with Denmark having the greatest upward economic mobility and lowest income inequality. Yes, the same Denmark that is a welfare state with socialized medicine. The same Denmark that has the highest income tax in the world with a minimum at 42% and a max of over 62% a 25% VAT and the highest minimum worldwide. Denmark incidentally also has one of the freest markets making it more capitalist than the US. “People like to think of America as the land of opportunities,” says Dr. Kathryn Wilson, associate professor of economics at Kent State University. “The irony is that our country actually has less social mobility and more inequality than most developed countries.”
Now the real question is why the Republican Party has stuck by such a flawed economic theory for so long and why have so many Americans have continually been taken in by it? Well on one hand, the corpse of zombie Reagan is trotted out every time this theory is mentioned so I’m sure that contributes to the cult that’s been built around it. However, the real factor is The American Dream©. The ubiquitous nice suburban house with two kids and a car in the driveway is quite an appealing image to many Americans. Everyone likes to believe that at some point in their lives they will be wealthy, that with some hard work and elbow grease anyone can rise to the top. In reality, they will never even reach upper middle class. Children from low-income families only have a 1% chance of reaching the top 5%. It turns out that the majority of the people who are born poor end up staying poor, living poor and dying poor. Shocking isn’t it?
It’s about time the ‘trickledown theory’ was killed and buried. It’s about time America as a whole took a good, long, hard look at our country and what’s happening to it. It’s about time we stopped ignoring the fact that we are increasingly falling behind in every standard of living indicator compared to the rest of the developed world from healthcare to education and even economic competitiveness. It’s about time that we take action; health reform; educational reform, economic reform, and political reform aren’t just nice buzzwords but absolute necessities for the survival of America and the American Dream. President Obama’s healthcare plan is just one small step in a long road to revive the American Dream. If he succeeds then perhaps the American Dream can be resuscitated and live on even greater than ever before. If he fails….well, I hear Denmark is nice this time of year.
