If there are any lessons learned from this pandemic — other than the obvious need for preparedness — let's hope it is an acknowledgement that trickle-down economics is either a failed theory or a cruel hoax.
Supply-side economists contend that lowering tax rates for wealthy individuals — the so-called job creators — and corporations will stimulate the economy by giving those at the top more money for business investments. Supply-siders like Arthur Laffer and his spawn argued that growing these companies will create new wealth that would trickle down to the working class in the form of new jobs and higher wages.
President Ronald Reagan implemented this theory — one his vice president and one-term successor, President George H.W. Bush, famously described as "voodoo economics" — but had to backtrack after he discovered its fundamental flaw. The tax revenue generated by income from working-class wages and consumer spending never came close to what the U.S. Treasury lost after Reagan convinced Congress to cut taxes for America's wealthiest families.
America's first foray into supply-side economics more than tripled the national debt, which swelled from $900.76 billion in 1980 to $3.06 trillion a decade later. The federal government ran up the budget deficit in similar fashion while Reagan's experiment with trickle-down economics drained the national treasury.
President Bill Clinton returned to a Keynesian economic model and pushed through a tax hike during the early years of his two-term presidency. The flow of new tax revenue, coupled with spending cuts supported by a Republican-controlled Congress, produced the first budget surplus in modern history, but President George W. Bush resuscitated supply-side economics, presided over a second era of trickle-down tax cuts even while engaging in a war against terror on two fronts.
Bush's flirtation with trickle-down economics, in conjunction with other policies designed to prop up the top with a promise of some future benefit filtering down to those below, ended with the collapse of global financial markets. The long road to recovery — aided by a return to a Keynesian model of economics driven by demand — ended in 2017 with the passage of a $2.3 trillion tax cut for the very wealthy and corporations.
Despite the hype before and after its passage, the 2017 Tax Cut and Jobs Act failed to produce economic stimulus that had been promised. Corporations spent much of the excess capital on stock buybacks, the national gross domestic product never exceeded 3% growth on an annualized basis, and those higher wages for workers never materialized.
As Laffer's economic model buckles again under the weight of a growing mountain of evidence, those who benefit from the tax cuts — the super rich and those whose campaigns they support in an effort to consolidate even more power and wealth — seem to believe pandemic relief will trickle down. They scorn the idea of guaranteed wages for those who lost work — a model proven to work in other countries — then dole out hundreds of billions of dollars to businesses that promised to protect paychecks but made no guarantee to follow through on the pledge.
Pursuing a policy that props up companies in the short term ignores a more immediate problem: the financial stability of America's unemployed workers and the families they support. While the number of newly unemployed workers might have leveled off, the number of initial claims has trended higher each of the past two weeks with more than 1.4 million new filers — there are more than 16.19 million continuing claims in mid-July.
Economists believe the numbers in the surprisingly positive sales tax reports published earlier this month were buoyed buy the federal supplement for unemployment insurance and $1,200 stimulus payment. The pandemic-related unemployment supplements expire this week, and the stimulus check was a one-time payment.
A report published Thursday showed the U.S. economy shrank 9.5% during the second quarter, the largest quarterly decline since the government began publishing that information 70 years ago. The economic contraction came as states phased in reopening plans, unemployed workers received an extra $600 week from the federal government, and those $1,200 stimulus checks were being spent.
If the guiding principle now is supply-side economics, it will be America's hope for any future that trickles down.
D.E. Smoot covers city/county government for the Phoenix.