Can the U.S. Economy Be Fixed? Experts Say “Trickle Down” Theory has Only Made Poor Poorer & Rich Richer

Income inequality has increased at an alarming rate in the last 30 years. High gas prices and rising food costs are only exacerbating an already growing problem. The “trickle down” economics that have for years been the justification for giving huge tax cuts to the super-rich met with just one little problem; the money never did trickle down. Oops.

Like no other time in history, the rich in the US are getting richer, and the poor are getting poorer. Americans love bootstraps stories of how every American can be rich if he or she just tries hard enough. But the truth is that Americans are trying harder than ever. They are working longer hours, and are more productive than ever before, but are still getting poorer. Somehow the “American Dream” isn’t telling the whole story.

Robert Reich, a professor of public policy at the University of California at Berkeley and former secretary of labor in the Clinton Administration says that the “trickle down” theory has only made the poor poorer and the rich richer, and when your average Americans start being more productive, they aren’t the ones who benefit from it.

“The basic reality is this: For most Americans, earnings have not kept up with the cost of living,” notes Reich. “This is not a new phenomenon, but it has finally caught up with the pocketbooks of average people. If you look at the earnings of nongovernment workers, especially the hourly workers who comprise 80 percent of the work force, you'll find they are barely higher than they were in the mid-1970s, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Per-person productivity has grown considerably since then, but most Americans have not reaped the benefits of those productivity gains. They've gone largely to the top.”

The Federal Reserve Board's "beige book" for June and July shows that American consumers are cutting substantially back on their purchases of everything from food to cars, appliances and name-brand products. As consumers cut back on spending because they have no money to spend, employers likewise cut back hours, wages and benefits and a downward spiral ensues.

Reich believes, “The normal remedies for economic downturns are necessary. But even an adequate stimulus package will offer only temporary relief this time, because this isn't a normal downturn. The problem lies deeper. Most Americans can no longer maintain their standard of living. The only lasting remedy is to improve their standard of living by widening the circle of prosperity.”

But so far, things don’t seem to be changing. CEOs, even the most incompetent ones that are running their companies into the ground, are seeing their incomes rise as their workers incomes are falling. As Americans lose their homes, and their retirement funds, Wall Street Hedge fund managers are reporting record earnings as they profit from the disaster.

In reference to the billion dollar profits that Wall Street is raking in at the expense of Americans, The New York Times recently reported, “Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad.”

According to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington, such inequality hurts our chances of an economic recovery. Since 1913, the United States witnessed only one other year of such astoundingly unequal wealth distribution — 1928, the year before the stock market crashed.

“For a recovery to be robust and sustainable you can’t just have consumer demand at Nordstrom,” explained Bernstein in The New York Times. “You need it at the little shop on the corner, too.”

However, many Americans are now having a hard time even paying for the basic necessities, and are finding it increasingly difficult to do so.

As for Reich, he points out that the real problem isn't the collapse in housing prices, or the frenetic rise in oil and food prices. While these are certainly contributing to the problem, they aren’t directly creating it. We were able to cheat our way out of the pain of inequality for a time using various coping mechanisms, but the writing was always on the wall. Unless major changes are embraced, the U.S. economy will continue to tank.

Rampant and growing inequality in America is bad for the economy for many reasons. “The very wealthy are more likely to invest their earnings wherever around the world they can get the highest return” rather than spend it at home, Reich explains.

“This underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. But they have now run out of such coping mechanisms…the first coping mechanism was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970, to more than 70 percent. But there's a limit to how many mothers can maintain paying jobs.”

So, what’s the solution now that even two breadwinners can’t support one family? Do Americans need to start working harder? According to Reich, we’re reaching the end of how much we can possibly work.

“The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.”

Reich says many Americans were also able to stave off an impending financial crisis by relying on “a third coping mechanism”: home-equity. People began to borrow against their homes, but when the housing market bubble burst, things got ugly.

“Americans are reaching the end of their ability to borrow, and lenders have reached the end of their capacity to lend. Credit-card debt, meanwhile, has reached dangerous proportions. Banks are now pulling back,” Notes Reich. “As a result, typical Americans have run out of coping mechanisms to keep up their standard of living. That means there's not enough purchasing power in the economy to buy all the goods and services it's producing. We're finally reaping the whirlwind of widening inequality and ever-more-concentrated wealth.”

Reich believes the only long-term solution to the economic crises is to increase the real earnings of middle-class and lower-middle-class Americans. He also says the days of hoping that coddling the richest of Americans is somehow going to help the poor are long gone.

“The answer is not to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We've tried that, and it hasn't worked. Nothing has trickled down. Rather, the long-term answer is for us to invest in the productivity of our working people -- enabling families to afford health insurance and have access to good schools and higher education -- while also rebuilding our infrastructure and investing in the clean energy technologies of the future. We must also adopt progressive taxes at the federal, state and local levels. In other words, we must rebuild the American economy from the bottom up. It cannot be rebuilt from the top down.”

Posted by Rebecca Sato.

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Sources:

http://www.alternet.org/story/93729/the_heart_of_the_economic_mess/

http://www.nytimes.com/2008/04/16/business/16wall.html?hp

Comments

[nepharous]

Mr. Reich coupled with Paul Krugman are the only economic truth tellers left. The American people need to understand that massive wealth inequality will desrtoy democracy. When the Supreme court equated political contributions with free speach the obvious happened, THOSE WITH THE MOST MONEY HAVE THE LOUDEST VOICE. That same Supreme Court (Renquists) also gave corporations the same rights has an individual. I didn't know that a corporation was a living thing! If this country does not start a serious labor movement again very soon we will truly become the Fascist State that the Repulicans have been pushing for since the attempted coup on FDR in 1934. Eat the Rich!

[macrumpton]

Is it a coincidence that the average wage has stagnated and the minimum wage is stagnated? I don't think so. If the minimum wage was tied to a realistic living wage based on the cost of necessities for life, then the average wage would be closer to where it should be.

Of course having the political system less money centered would also help.

Maybe some billionaire would fund a massive get out the vote campaign for low income people, and then we might get some politicians we can trust.

That would be a lot of work. It would be cheaper and easier to hire an army of spys to monitor everything every member of congress does 24/7 and then blackmail the scoundrels into passing good legislation. I suspect the oil companies and Cheney are already doing that, which would explain a lot...

[Hamy]

Excuse me, but just how stupid do you have to be to realize that the inherited wealth of an enormously privileged and protected uber-class (think Getty/Hilton/Richie) is yours for the taking simply by putting in a few extra hours at Taco-Taco?
Short of becoming a world famous 'something' the chances are and always have been negligible that meaningful wealth may be accrued in one lifetime. Rarities such as the modern software billionaires come mostly from privileged university backgrounds and middle class supportive families, the Russian oligarchs are all wealthy due to their proximity to money and power in the first place. No average Joe/Jane is ever going to be in a position to exploit their multi-billion ideas without running a gauntlet of greed from VC firms and other (irony here>) benefactors. The 'free access to wealth' myth is just another form of ideological enslavement of the working people without whom the wealth of the wealthy would be meaningless. Sure, your billion dollar idea wont get off the ground without your greatest efforts, but your greatest efforts flipping burgers will never make you rich. Any nation that claims it is a meritocracy and proposes that wealth is available is preaching to its own upper minorities and brainwashing the rest of its population. Come the revolution...

[Dave]

VIVA LA REVOLUCION!!!

[Len 'Existentialist Cowboy' Hart]

Thanks for the article. Indeed, Reagan's own budget director --David Stockman --called 'supply side economics' (trickle down theory) a 'Trojan Horse'. In other words, it was DESIGNED to hoax the general public into supporting. Like most GOP strategies, the GOP sold trickle down theory with using words like "supply side economics" which were intended to deceive the media and the general public. GOP 'insiders' knew that it was just a big whopping give aways to the exceedingly rich.

[janet]

Despite the stats, there are still 100K and 150K jobs posted on employment sites. Here's 3 sites from About.com's newest top 10 employment site list -

http://www.realmatch.com
http://www.linkedin.com
http://www.indeed.com

Lots of high paying jobs...seems contradictory to the stats but its true

[Andy]

Great piece and Obama looks to have taken the opposite stance to this theory.