WASHINGTON, September 29, 2016 — Earlier this week during her debate with Donald Trump, Hillary Clinton used the term “trumped up, trickle-down economics” to refer to Trump’s economic policies. She said these ideas are just tax cuts for the wealthy and won’t help the middle class. Besides, she noted, those tax cuts are what led to the financial crisis.
Is she right? And what exactly is trickle-down economics?
During the 1970s, the U.S. inflation rate soared, peaking at about 13 percent. Unemployment rose with it, peaking at more than 10 percent. The economy was stagnant: The term “stagflation” was born: inflation in the midst of economic stagnation.
Policy makers were baffled. An increase in government spending could stimulate growth, but it would add to inflation. Yet if taxes were cut, the result would be the same; both policies are geared to stimulate demand.
Economists hit upon a different approach. Instead of stimulating demand alone, it might be better to stimulate demand and supply together, they reasoned. Growing supply would put downward pressure on prices. Output would grow to meet the new demand.
The way to accomplish this “supply-side solution” was to cut taxes for all Americans and especially for those who could create the capital needed for the expansion. Opponents dubbed this approach “trickle-down economics” which, they said, simply hides the fact that tax cuts are being given to the rich, who really don’t pay their fair share anyway. As a result, they argued, this new idea simply wouldn’t work. Giving tax breaks to the wealthy and hope the benefits trickle down to the rest of us is simply a myth, they claimed.
But in 1981, under the new Reagan Administration, Congress reduced tax rates for all Americans. This meant that the middle class had more disposable income which, when spent, stimulated demand.
Businesses and higher income earners used their increased disposable income to make investments and supply the capital needed for growth. The increase in demand from consumers, followed by the increase in supply from business led to rapid economic growth.
In 1984, the annual U.S. growth rate exceeded 7 percent. Inflation fell rapidly from 13 percent to 3 percent. America’s unemployment rate was cut in half by the end of the decade. Almost simultaneously, the U.S. economy went on a 25-year growth surge, save for a couple of small hiccups in 1991 and 2001.
Surprise! Trickle-down economics works.
Regarding “fair share”: There has never been a clear definition for that term. In 2015, the top 20 percent of income earners paid about 85 percent of all income taxes. Almost half of American households paid no federal income taxes at all. How much more should the top income earners pay?
Donald Trump has stated he will lower tax rates for all Americans, including the highest income earners—those who supply the capital needed for economic expansion. He would reduce the corporate tax rate, which would encourage companies to do business in the U.S. and remain headquartered here rather than in countries with much lower corporate tax rates.
That could result in companies locating or relocating back to the U.S., which may, at least in part, be why Trump says he can bring jobs back to America. He would also reduce burdensome and unneeded regulations that serve to slow economic growth.
For her part, Hillary Clinton says she would continue the policies of the Obama administration, arguing that cutting taxes for the wealthy will not grow the economy. Policy-wise in fact, she would do just the opposite. She would raise the tax rate on the highest income earners by another 10 percent.
Clinton supported President Obama’s 10 percent tax rate increase on wealthy individuals and his raising of the capital gains tax rate from 15 percent to 20 percent, and in some cases 23.8 percent. The cumulative result of those tax decisions is that President Obama will have served his entire eight years in office without experiencing at least one year with economic growth of least 3 percent. He is the first president in history to gain this dubious distinction.
The past eight years of economic stagnation has, in turn, led to all the economic problems Americans have recently experienced and continue to experience. Government spending increases, tax revenues grow slowly, the annual deficit is large and getting larger, income inequality worsens and few new job opportunities are created. It is this lack of opportunity, in turn, that contributes greatly to America’s growing social problems.
Hillary Clinton’s claim that trickle-down economics is what led to the financial crisis is based on fantasy, not on facts. As Americans learned in the 1980s, significantly reducing tax rates to encourage economic growth will lead to a prosperous economy, not a financial crisis.
In other words, maybe trumped up, trickle-down economics is just what America needs today.
*Cartoon by Branco. Reproduced with permission and by arrangement with LegalInsurrection.