Busting the Myth: Trickle Down Economics Work
Jeff Alworth
This past weekend, I had an illuminating discussion with my mother, who has the political misfortune of splitting her time between the red states of Arizona and Idaho. As a known liberal, she's regularly fielding queries from now-anxious red-staters who have been fed a steady diet of lies and propaganda, which conflicts with what their reality-perceiving eyes tell them. When we debrief, she often expresses the wish that she had a simple, very clear point to offer those who are used to the simple, very clear lies they've been fed on Fox. Okay, Mom, this series is for you. I'll do one of these every week or so for the next few weeks. The simple point will be on the front page, and some further discussion will follow below the jump.
Myth: Trickle-Down Economics Work
John McCain doesn't know much about trickle-down economics. 
But he does know that his base loves them, and what a wonderful world it would be if they worked.
Of course, they don't.
Trickle-down (also called "supply-side") theorists hold that pumping money into the hands of the wealthy will cause them to invest in business, which will in turn cause the economy to grow, which will create jobs, which will (finally!) get money into the hands of the working stiff. The theory is behind the Bush tax cut, which John McCain would make permanent, and goes back to Ronald Reagan, the standard-bearer for the modern GOP.
The best measure we have to demonstrate what a wholesale failure they've been is to chart the growth of median household incomes since 1980. (For an explanation of why median incomes is a good measure, see "Further Discussion" below the jump.) When Ronald Reagan was sworn in, the median household income was $48,976. In 2006, the last year US Census numbers were available, it was $58,407, a growth of $9,431 (all in figures adjusted to 2006 dollars). Of that growth, 83% is attributable to the eight years under a Democrat. Republicans account for only 17%. 
The Bushes, remarkably, have driven median incomes down.
This year, John McCain plans to roll out the tired canard that "a rising tide lifts all boats" and that trickle-down economics--while they've failed in the Bush administration--are just about to deliver the promised riches. Sure, unemployment is up, we're in the middle of our second Bush recession, and the markets are dropping, but all of that is about to change so long as we stay the course. It's not true, and McCain, who voted against the original tax cuts, knows it. (Or maybe he's just confused.) In eight years, Clinton delivered nearly five times as much growth to average Americans' income as Republicans did in eighteen years. The math doesn't lie: Republican economics just don't trickle down.
Further Discussion
When Median is "Average"
In any discussion about "the average" anything, it's important to know what you're measuring. The statistics for means and medians are regularly used interchangeably in the media, but they're not the same. The mean statistic is the average of the total. The median statistic is the number that divides the population in half (the number at which half make more, half make less). When we talk about the "average" American, people understand this to indicate the person who makes an average amount of money, not the average of all Americans. One of Bush's sneakiest techniques has been to use the mean to describe the "average American" when he is trying to fudge reality. As in: the "average American will enjoy a $2,000 reduction in taxes thanks to this tax cut measure."
Here's why it matters. Let's say you've got about 100 loggers in a bar in Roseburg. Their salaries range from $20,000 to $80,000. If you add up all their salaries and divide by the total, you get $50k (the mean). If you put the 50 lowest-paid on one side of the room and the 50 of the highest on the other, and see which number would be right in the middle, you also come up with $50k (the median). In this group, average doesn't tell us much.
But as it happens, Steve Rogel, CEO of Weyerhauser, is in town and he steps into the bar. That shouldn't change the average, right? Depends on how you measure. Rogel makes just a bit more per year ($5.3 million) than everyone else in the bar put together. If you use the mean, then the "average" guy in the bar now makes $100k. But if he goes and sits with the loggers on the higher-paid side, moving the median up just a tick (the median), now "average" earns about $51,000. That's why we always use the median to see how Americans are doing, because we know that obscene wealth creation at the top won't conceal how people at the middle are doing.
The GOP Over Time
Historically, Republican administrations have done a better job at keeping the middle-class growing than the current era of supply-siders. 
Still, for a strong middle class, you can't beat the Democrats. Under all Republican administrations since 1947 (the first dates for which data were available), median incomes have grown a fairly-respectable 8.6%. But under Democrats, it has grown quite a bit more robustly: 14.5%.
In Figure 3, you can see the enormous gains that occurred in that postwar period in mid-century. From 1947 to 1972, median incomes went from $23,433 to $46,820--almost exactly doubling. After that, with the exception of Clinton, things don't look so hot. And even the Nixon/Ford bar is misleading. Growth in the second Nixon/Ford term was almost non-existent, moving up just a tick to $47,118. The Carter administration is roundly excoriated for it's poor performance, but despite the reputation, it out-performed the previous four years. From 1972 to 2006, Democrats (in office just 12 of the 34 years) accounted for 84% of the growth.
There are many, many more factors to consider when looking at economic performance, and I'll try to get to some of them in coming weeks. The upshot of this post should be clear, though: Democrats are far better for middle class incomes than Republicans.
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Jun 19, '08
Whatever the employment stats are these days - I see a lot of high paying jobs on employment sites -
http://www.realmatch.com http://www.monster.com http://www.simplyhired.com
Dont dwell on the layoff, or the economy or the recession or gas prices, look to the future!
10:37 p.m.
Jun 19, '08
Jeff -- It might be illuminating to chart these numbers year by year, rather than administration by administration....
10:37 p.m.
Jun 19, '08
Oh, and thank you, Mr. Numbers Guy! This is a great post. More like it, please.
Jun 19, '08
A nice succinct debunking of the Trickle Down scam, Jeff.
Jun 19, '08
Kennedy lowered taxes, and it seems like it worked pretty well. Supply-side economics isn't wrong. According to the Laffer curve, there is some level of optimal taxation. I think Clinton was pretty close to that optimum level.
You talk about "pumping money...to the wealthy" as if being wealthy is a dirty thing. The point of "supply-side" tax cuts is to encourage investment, which leads to jobs and lower prices. But we can't lower taxes when we're beyond that special point on the Laffer curve where tax cuts reduce revenue because then we can't pay for basic government.
Bush was stupid enough to think that we could cut taxes and increase spending. If he had cut both, the economy would probably be doing fairly well in general, even though we wouldn't have the level of equity and justice that we dems want.
I think that it is possible (but rare) to be a thoughtful fiscal conservative. The biggest difference is how much value we place on equity (how much of the pie everyone gets) vs. efficiency (how big the pie is). Smart dems (Krugman, Rubin) are focused on equity, smart reps are focused on efficiency (O'Neill, Friedman).
11:18 p.m.
Jun 19, '08
DB... let's pull our head out of the laughable Laffer theory, and talk about some reality.
Oregon's business tax level is #50 in the nation. Dead last. (2004)
If low business taxes create jobs, where the hell are the jobs? Why are we #6 in unemployment, rather than #50? (2005).
At least with respect to Oregon and the last decade, it's quite clear that low business taxes don't create jobs.
Jun 20, '08
Interesting numbers, Jeff.
Of course, it's also fascinating how presidents are given undue credit (and undue blame) for the state of the economy, when Congress controls the purse strings, and the Fed controls monetary policy.
Why, you could take a look at that same span from 1980-2006 and conclude that of the $9,431 increase in median household incomes, more than 66% was attributable to the 12 years under a Republican Congress. Democrats account for less than 34%.
You could do that. I wouldn't, because it's far too simplistic to say that one party, or one branch of government (or government, period, for that matter), is "responsible" for the condition of the economy. I suppose the Fed has the most influence -- remind me again, who was running the Fed during the halcyon Clinton era?
One might also take note of the fact that given the cyclical nature of the economy, the party that's in power the longest during a given span of years by definition has more possible exposure to the inevitable down swings. That could be another explanation for the relatively better performance (by this selected metric) of Democratic presidents and Republican legislatures. Clinton managed to squeeze in to what was a slightly longer than average gap between recessions, historically speaking. Was that extra time between recessions the result of his "handling" of the economy? Or was it due to the "handling" of the Republicans who ran Congress for the last 6 years of his presidency? Or, was it just plain luck of the draw as the economy did pretty much whatever the hell it was going to do anyway?
All I'm saying is, correlations are interesting (and there are many to be drawn here -- and different data to be examined as well, such as median worker income versus median household income which puts a slightly different twist on things). But correlation is not causation, and it's dangerous to jump too far to reach a conclusion. ;-)
Jun 20, '08
Kari, I think you're making the same mistake that conservatives always make. You're only looking at one side of the curve. The Laffer curve suggests that taxes can be too low as well as too high.
I don't think business taxes are important- businesses don't pay taxes, people do. A business pays taxes by taking it from employees, managers, or shareholders (since those are the only three options). Having said that, I think personal income tax rates in Oregon are relatively decent.
If I was king of the world. I'd cut the income tax, add some progressivity to it, and introduce a sales tax equal to the cut in income tax. But I'm not :(
9:01 a.m.
Jun 20, '08
Jeff -- It might be illuminating to chart these numbers year by year, rather than administration by administration....
I chose administrations specifically for the political punch they offer. When the GOP talks trickle down--using language very similar to DB's above--it seems persuasive. That's why it's worth looking at the record to see how well the rhetoric holds up. But then David Wright asks a relevant question:
Why, you could take a look at that same span from 1980-2006 and conclude that of the $9,431 increase in median household incomes, more than 66% was attributable to the 12 years under a Republican Congress.
And then adds, for added punch, the capper:
But correlation is not causation, and it's dangerous to jump too far to reach a conclusion. ;-)
Your points are true in theory. Congress does control the purse strings and it is from Congress that bills issue. However, particularly in the last 26 years, Congress has looked strongly to the President to set the terms of the deal (Bush one is a possible exception). This is particularly true of the current administration.
When you look back through time to the 70s and earlier, I think your point holds more water--which is one reason why I didn't highlight the earlier administrations.
But I do want to strongly make this case: the current financial troubles are very much the result of President Bush. This is his economy, his experiment, and his results. That's why I titled it a myth that trickle-down economics work--that's the stuff of recent administrations.
And you're right, this isn't the final picture--it's one dimension. How did the economy do under these presidents? What effect did taxes pay on citizens' bottom line? These are a couple of the issues I will take up in coming weeks.
Jun 20, '08
I'm going to agree with David Wright on this one. It is not a clear picture to paint the President as in control of the economy. While a strong President can use his bully pulpit (or catastrophic incidents like 9-11) to push through economic reforms, it has to be Congress. The President can only do two things, somewhat independently; appoint Fed governors and increase or decrease the enforcement of IRS rules. Oh he can also sign disastrous Free Trade agreements, but needs Senate approval.
Also, reforms that happen one year can take several more years to take effect, so a bump in the economy under one President can be the result of another President's policies that were enacted by a previous Congress.
I too agree that Supply Side economics doesn't work, but am more inclined to base my agreement on the growing inequity as marked by the Gini Coefficient after numerous years of supply side economics (and for Ferris Bueller fans out there that would be "blank- d-o-o economics, voodoo economics")
Finally, I really hope Americans (or at least students who sat through my Economics classes) recognize that the magic words "tax cut" usually means a capital gains tax cut. I would not be opposed to a tax cut that exempted say the first 25000 of PAYROLL income (and I would include retirement and military benefits here because I'm not politically stupid enough to leave old people and veterans out of this) as tax free. But if you get your money from a dividend, real estate sales, or stock capitalization then you don't qualify for the exemption.
James Mattiace IN Rabat, Morocco
Jun 20, '08
What I'm saying is not from GOP talking points. It's from Econ 101 (and that wasn't my last econ class, btw), where we used Paul Krugman's textbook. The truth is that economists agree on 90% of economic theory. They agree that tax cuts result in increased economic activity, they disagree whether the benefit is greater than the cost.
Jun 20, '08
Im still waiting for you Obama's supporters Hope and Change....Im not seeing it.
Same old, worn-out, class warfare garbage...
Is this supposed to unite us, and bring us together?
Jun 20, '08
Wellllll.... I think that may be a bit of a reach, too. You can certainly argue that the economy under both Bush administrations was anemic (at best). But the interesting thing that I see in the data you use as a source for your argument is that the grand-daddy of trickle-down, Reagan, saw nearly as much increase in median household incomes as Clinton.
Clinton, without a recession to start his presidency, saw a real gain of almost 17% in the median household income. Reagan, from the end of the recession that started his presidency (and, as James Mattiace pointed out, after his policies had been given a couple of years to take effect) saw a real gain of more than 14%.
Would I take a 17% gain over a 14% gain? You bet. Would I describe a 14% gain as a "failure"? No.
Also interesting -- the ratio of mean to median incomes during the Reagan years went from 1.14 in 1980 to 1.19 in 1988, continuing a generally shallow upward trend of the past 50 years. The same ratio during the Clinton years went from about 1.21 to 1.29, a significantly larger increase. In other words, under Clinton the mean income strayed from the median farther (and faster) than under Reagan -- sort of a rough shorthand for the rich getting richer relative to the middle class.
Anyhow, your basic conclusion -- that Democrats are better for the middle class than Republicans -- hasn't been generally proven from the data provided. Some Democrats have presided over good times for the middle class, and some Republicans have presided over not-so-good times. And vice-versa.
By the way, trickle-down economics per se does not imply deficit spending. I believe that the economic sins of the current administration (and I'm totally in agreement with you on that point, that those sins are numerous) have more to do with reckless deficits than with supply-side theory. And, as DB pointed out, the Laffer curve shows that supply-side has limits. Slashing taxes while increasing spending to the point that resultant economic growth can't possibly make up the difference isn't supply-side, it's suicide.
But you can't hold the theory responsible for its misapplication by idiots. Blame Bush, by all means, but be careful not to paint with too broad a brush.
10:51 a.m.
Jun 20, '08
David, thanks for your careful discussion. After a bruising primary, I am really delighted to be back in the policy side of things. That said, as my friend the eonomist knows--I regularly misread economic data. So it's good to pull this stuff apart.
So walk me through this.
But the interesting thing that I see in the data you use as a source for your argument is that the grand-daddy of trickle-down, Reagan, saw nearly as much increase in median household incomes as Clinton.
Where are the numbers you say James (writing from Morocco--cool!)(or actually hot) cites? I'm not tracking on the 14% and 17% numbers you cite. Based on the census figures, adjusted for inflation, Reagan saw about half the growth of Clinton.
Now, one thing that lends some credence to the argument that Reagan was responsible for the growth under his own administration is that most of the growth happened in his second term. In fact, median incomes were slightly lower in 1984 than they were in 1980 (in inflation-adjusted dollars).
But didn't the modest gains under Reagan (as compared to the other presidents since 1947) come at a huge cost? In order to fund the tax cuts, Reagan went into deficit spending, effectively screwing GHW Bush.
I'll go look at the mean/median figures--do you have source for those? I agree that inequality is a huge issue--perhaps less for the bottom line of an average citizen (income not being a zero-sum game)--but in terms of the collection of power and corruption of politics.
Jun 20, '08
Jeff wrote:
I agree that inequality is a huge issue--perhaps less for the bottom line of an average citizen (income not being a zero-sum game)--but in terms of the collection of power and corruption of politics.
If by "average", you mean "median", it seems to me that inequality should be quite important to that citizen, since growth, especially under Republican administrations, has predominantly benefited the highest income individuals. Or am I missing something?
11:05 a.m.
Jun 20, '08
On the president and the ability to levy taxes. This is a really important point so I'm using a second comment.
The issue isn't logistical--of course you're right that Congress has the Constitutional right to raise revenue ("The Congress shall have Power To lay and collect Taxes..."). But in function, the president has enormous control over which legislation Congress takes up. There's a reason we call the 1981 Economic Recovery Tax Act the "Reagan Tax Cut." I would like to hear an argument about how since 1980 the various Presidents didn't get their tax policies passed.
It's more than a bully pulpit. The President is the leader of the party and the person who sets the agenda. In part it's because of the veto pen, but in part it's because the authority of the executive has grown with respect to tax policy since Reagan.
To say that you can't attribute tax policy to the president because Congress passes the bills is like saying you can't smoke marijuana in Amsterdam because it's illegal. In this case, I think causality is easier to identify than you allow.
11:09 a.m.
Jun 20, '08
This will be my last comment for awhile, and then I'll let the thread breathe a little. But since Tom asked:
If by "average", you mean "median", it seems to me that inequality should be quite important to that citizen, since growth, especially under Republican administrations, has predominantly benefited the highest income individuals. Or am I missing something?
If the median income was growing at a steady clip and outpacing inflation, I think that the average--or median-earner--would be less concerned if the very wealthy were getting even more wealthy. The context is that when incomes become unequal, it has historically meant the middle-class gets squeezed. And the reverse, as in the great compression at midcentury, generally means the middle class enjoys robust growth.
Jun 20, '08
Great post and comments. I've never responded to anything before and am very computer and internet ignorant. I tried to print this of to present to my Bush supporting relatives and was unable to. Can anybody help?
Jun 20, '08
Couple quick comments: 1) GREAT to hear a civil back and forth re: whether trickle down works.
2) Only passing reference to the effect of deficit spending in Jeff's 10:51am post. It deserves MUCH more consideration. It is a simplistic but basically fair comparison think to compare to ones personal/household budget. You just can't maintain that. One could argue you can if you use the debt to invest in income producing investments. We clearly aren't. The lack of paying as we go artificially boosted the income figures you all mention during times when deficit spending occurred (Reagan started it all). When you factor the debt increase (mostly grew during Repub administrations), the "real" income performance of Repubs is even worse than you report.
I've always wondered: Trickle down "hopes" by reducing upper tax rates those fund will be invested to spur the economy. Rather than "hope" for it, why not maintain higher tax rates but put targeted tax cuts for those that DIRECT investment in job producing assets? Sure, buying a yacht produces some jobs, but investing in the end-product is not nearly as efficient an investment as the equipment to make the yacht.
Last, it would be nice to enforce the tax laws we have. David Cay Johnson's book Perfectly Legal in 2004 was well researched, factual description of how the wealthiest corps & individuals play the shell game to skirt paying taxes, but current admin has gutted the enforcement mechanism. Thus, those that pay their full share are those americans that receive a W-2 and have no where to hide. The actual tax burden is actually much heavier on the middle class than the tax rates imply.
Jun 20, '08
michael,
You should be able to select the post with your cursor, hit Ctrl+c to copy it. Open a new message in your email program and put your cursor in the body of the message. Hit Ctrl+p to paste the post. If you want the charts full size you'll need to expand, copy, and paste them separately.
Jun 20, '08
Sorry, Jeff, I was unclear when I cited James -- I was referring to this:
That was by way of explaining the validity of dropping the first two years of Reagan's presidency when comparing results to Clinton. Of course, it would be more fair to compare similar time frames between both two-term presidents. Let's go through this step by step (with corrections on my part, I had erroneously used the wrong years for some calculations). All of these calculations are based on constant 2006 inflation-adjusted dollars.
Based on the link you provided to median household incomes over the years, the change from 1992-2000 (Clinton's 8 years) was $51,494 to $59,398 -- an increase of $7,904, or 15.35% (My earlier claim of almost 17% was in error, based on 1993 numbers).
The equivalent Reagan period of 1980-1988 gives us an increase from $48,976 to $52,720 -- an increase over those 8 years of $3,744 or 7.64%. So yes, if you compare all 8 years of Clinton with all 8 years of Reagan, Clinton's increase was about double.
However, if you drop the first two years of each president's administration, given the idea that it takes some time for that administration's policies to take effect, a different picture emerges.
From 1994 to 2000, median household income increased $7,225 or 13.85%.
From 1982 to 1988, median household income increased $5,711 or 12.15%. (Again, my earlier 14+% claim was based on incorrect years.)
So the specific numbers are a bit different from my original comment, but the relative point is the same -- if you look at the years of Reagan that his policies were in full swing, median incomes rose nearly as much as the equivalent period under Clinton's policies.
But wait, you say, if the first two years of Reagan don't count, wouldn't you have to include the two years after Reagan as part of his economic legacy? And, if so, you'd add two years after Clinton to his score as well.
In which case, Reagan's 8-year legacy from 1982-1990 corresponds to 12.47% growth in median household income, while Clinton's 8-year legacy from 1994-2002 corresponds to only 11.02% growth.
Crunching numbers can be kind of excruciating... but I suppose my overall point is that depending on where you take your baseline, the numbers can paint dramatically different pictures. But I think it's reasonable to discount the first couple of years of an administration when comparing economic indicators.
Regardless, median household incomes enjoyed a pretty solid growth in the last 6 years of Reagan's administration, nearly as strong as during the last 6 years of Clinton's administration. Reagan's gains were made while trickle-down was more-or-less in full swing, so the fundamental thesis that trickle-down doesn't work is not really supported by the data you've presented. I'm not saying the data proves the opposite, either, BTW. Just that you haven't exactly proven your point.
Jun 20, '08
sorry - that's Ctrl+v, not Ctrl+p to paste - brain recess
2:02 p.m.
Jun 20, '08
Michael,
To add to what Tom just said, to "select" the text you either need to drag the cursor down over the whole text with the left mouse button (windows) or mouse (mac) held down;
or you could do a "select all" if you wanted the comments too, which is either control-a (windows) or apple key-a (mac).
If you have a mac, copying is the same except it's the apple key-c (not control key), but pasting is apple key-v.
Jun 20, '08
Just to be clear, the source for the numbers I mentioned in my last comment came from Jeff's original post.
Here's the link.
I just took the table for all families (the first table on the page, which Jeff used for his original figures) and copied it into a spreadsheet. From there I did the calculations (gotta watch those cell references in formulae!)
Likewise, from that same spreadsheet I calculated the ratio of mean income to median income. I think this number is very vaguely meaningful in that it shows how much higher the "average" is than the median -- Jeff's original comments about the relevance of each figure are well-taken. You can't read too much meaning into that ratio alone, though, without more information about the data set as a whole.
2:16 p.m.
Jun 20, '08
Oh, and if you want to send Jeff's charts, the copying and pasting won't get them. But if you click on them, typepad opens a bigger version in a pop-up window (which is nicer anyway) and then if you click on that image and hold the mouse down, after a sec a menu will appear and you can click on "copy image" and past that into your e-mail, either from the edit pulldown menu on the top bar of the screen, or by doing control-p/apple key-v again. I don't know if you'd want to paste them into the middle of the text about where they go, or put them at then and put a little note in brackets saying [scroll down to chart 1] etc.
Also, Jeff's formatting for emphasis (bold, italics etc.) will get lost in at least some e-mail programs (mine for example). If you wanted to preserve that, you could do the same things we've been talking about, except do the pasting into a word processing program document (like MS Word) and then e-mail it as an attachment.
Jun 20, '08
A) yes it's hot. Africa hot.
B) David sort of proves my point (and his own) but then falls victim at the end to the classic media portrayal. While numbers under Reagan did grow he had a Democratic House for all of it, and a usually Democratic Senate, while the D's lost the House two years into Clinton's term. And the wealth gap grew under both.
The media pays way too much attention to the President's domestic/economic policies. Its like the Bush 2004 commercials that warned that Kerry would raise gas taxes if President - actually Kerry was in a better position to raise gas taxes by LOSING the presidency.
And as for presidential economic policies that did not get enacted.....uh...Social Security Reform? And somwehat also famously, Papa Bush's "no new taxes", but faced with a Democratic Congress (and this was pre Desert Storm bump) he had to agree to IL Congressman Rostenkowski's tax hike) Bush originally proposed no new taxes in his budget. So there's two... CLinton's Health Care plan (and he had party friendly Congress) also fits here.
President's should be judged on their foreign policy and domestic "leadership" (a la FDR and LBJ) but not blamed or praised for the economy. Just as Governors should also be judged on their leadership and management skills, not the economy. Unless, like Herbert Hoover in the Depression or Kulongoski with M. 28 and 30 , they abrogate their responsibilty.
James Mattiace Still in Morocco ( and don't get me started on the Royal Ministry of Finance here)
4:02 p.m.
Jun 26, '08
Jeff: Great post, outstanding discussion!
Kari: You imply that the "Laffer" curve is unrealistic, but you actually give a pretty good example of it working. "Oregon's business tax level is #50 in the nation. Dead last. (2004)" Oregon also has one of the highest statutory corporate income tax rates in the country (and also one of the more easily avoided).
The "Laffer" curve is about collecting tax revenue, not unemployment. Unless by Laffer theory you mean "supply-side" economics in general. You ask: "Why are we #6 in unemployment, rather than #50? (2005)." Who knows, but having one of the country's highest minimum wages probably doesn't help.
.