Now, just as there was in Teddy Roosevelt’s time, there’s been a certain crowd in Washington for the last few decades who respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If only we cut more regulations and cut more taxes – especially for the wealthy – our economy will grow stronger. Sure, there will be winners and losers. But if the winners do really well, jobs and prosperity will eventually trickle down to everyone else. And even if prosperity doesn’t trickle down, they argue, that’s the price of liberty.
It’s a simple theory – one that speaks to our rugged individualism and healthy skepticism of too much government. And that theory fits well on a bumper sticker. Here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible post-war boom of the 50s and 60s. And it didn’t work when we tried it during the last decade.The idea, according to Obama and his supporters, is that markets only benefit wealthy people, and that standards of living for the vast majority of Americans have fallen since 1980. The only way to "restore" the middle class and bring others to that state of well-being is to employ massive wealth transfers from wealthy people to those who are less-fortunate. According to Travis Waldron of ThinkProgress:
Obama is right. The trickle-down policies put in place since the Reagan administration haven’t brought prosperity to the middle- and working-classes; if anything, they have made prosperity an illusion for the vast majority of Americans who don’t directly benefit from them.As I look through the Internet for references to "trickle-down" economics, the critics of markets claim that Progressive government policies from high tax rates to promoting subsidies, massive regulations, and high minimum wages are the key to prosperity. Writes American University Professor of Economics Jon Wiseman:
Until recent times, government was indeed the enemy of the overwhelming majority of people. Although it provided for defense and a degree of social stability, until the nineteenth century, elites used the state to ensure that they could extract as much as possible from the working population. Workers, whether slaves, serfs, indentured servants, or wage workers, retained merely the wherewithal to survive. Yet, the goodness of government was rarely in doubt. Ideology, crafted and controlled by elites, depicted the state as sacred, its rulers chosen by gods, or themselves gods. Government was part of the sacred order of things. Even when the state came to be legitimated in secular terms (as a social contract), elites continued to use the state to ensure that they could capture most of the workers' output beyond that needed for survival.Thus, one would argue, a government whose leaders and employees believed in the ideals espoused by Wiseman would create an atmosphere of equality with employment and opportunities for all. A political entity that would be devoid of the "market ideologues" who would argue for a return to free markets and a minimal governmental presence then would be free to impose those policies that would end the tyranny of economic inequality. Instead of "trickle-down" economics, the people would experience "trickle-up" in which government gives money to poor people who then spend it and create prosperity for everyone.
All of this came under challenge when the maturation of capitalism in the nineteenth century created the conditions in which the working class would, through the threat of violence, successfully petition for higher wages, better working conditions, education for their children, and the franchise. The franchise gave workers the power to peacefully claim a fairer share of society's income, wealth and privilege. The role of the state was in principle reversed from a social agency that enabled elites to capture virtually all income beyond subsistence, to one that could impede them from doing so. If the state were to become truly democratically controlled, then for elites, government would indeed become "the problem" as Reagan put it in his inaugural address in 1981. Their only remaining weapon would be in maintaining control over ideology. They would have to convince enough of the electorate that their best interests would result from those policies that would in fact enable elites to retain, if not augment, their wealth, power, and privilege.
Although worker living standards improved after the franchise was democratized, so too did inequality. The big break came in the 1930s during the Great Depression. The dire conditions of that decade delegitimated the elite's ideology, permitting the widespread acceptance of doctrines and policies that produced a 40-year period of declining inequality and substantial improvement for the lives of practically all Americans. It was the "great compression" in income, wealth, and privilege.
Government measures reducing inequality and improving conditions for the broad population included workers' rights to bargain collectively, Social Security, the G.I. Bill, Medicare, Medicaid, Food Stamps, public housing, rent subsidies, Project Headstart, Job Corps, Occupational Safety and Health Administration, the Consumer Product Safety Commission, the Mine Enforcement and Safety Administration, and the Environmental Protection Agency. The franchise was further extended to African Americans and desegregation began in earnest. Public goods that benefit the general population such as schools, parks, playgrounds, and public transit were vastly expanded in quantity and quality. Highly progressive income taxation also reveals the intent of redistribution toward greater equality. The highest marginal income tax rates were: 1942-43: 88 percent; 1944-45: 94 percent; 1946-50: 91 percent. Top marginal tax rates remained in the upper 80 percent from 1951 until 1964, and at 70 percent from 1965 until 1981.
As I watched parts of Baltimore burn, I came to realize that for the past four decades, that city has been able to engage in the very kind of political economy experiment that Wiseman and others quoted claim would bring prosperity for all. No longer would governmental leaders permit "trickle-down" markets to exist, looking to create "trickle-up" opportunities, instead. So, what has been the result?
For about 30 years, we have seen the construction of state-of-the-art stadiums for professional football and baseball, and the development of the Inner Harbor at Baltimore's waterfront. Indeed, these are all beautiful facilities and the Inner Harbor has a famous aquarium, shops, good restaurants, and high-end apartments and condominiums. Parts of Baltimore are an urban showplace, and then there are the affluent white neighborhoods throughout the city, along with the gleaming edifices of Johns Hopkins University and its world-class medical facilities and medical school. The city is full of good restaurants and is a Mecca of varieties of musical genres from Early Music (a favorite of mine) to authentic Irish Music.
The idea behind this development was to create an atmosphere that would attract more investment downtown with the benefits somehow trickling (or maybe flowing) into the areas dominated by African Americans. Success in one area was supposed to translate into a ripple effect of success elsewhere, but it has not happened. The black communities of Baltimore might provide some of the inexpensive labor that helps to facilitate much of the redevelopment and there might even be black residents of Baltimore who patronize the various "investments" of the redeveloped parts of that city, but for the most part, the problems plaguing black areas of Baltimore seem to be intractable and there is no real connection between the glitz of the for-show projects and the grime of nearby poor residential areas.
Baltimore black neighborhoods, not surprisingly, have high dropout rates from school, lots of crime, up to 50 percent unemployment, drug dealing, low academic achievement, substandard housing, and huge numbers of people on public assistance. No one argues with these facts. The argument, instead, centers around what to do about this situation, and the Progressives that have dominated politics in Baltimore for many decades have decided that the best way to change the fortunes of black residents of the city is to employ Keynesian Trickle-Down Economics. That's right: the so-called critics of "trickle-down" actually are its biggest supporters.
Who Benefits from Baltimore's Version of "Trickle-Down" Economics?
When I worked in Chattanooga's office of Economic and Community Development 30 years ago, I met a number of developers who flocked to the promise of government money to help subsidize their projects. Some of them had good ideas, but most of them were politically-connected Democrats who were creative and intelligent people, but with little understanding of basic economics. They wanted the subsidies, the low-interest loans, and the up-front fees they would make before they sold out and moved on to the next idea.
People do get rich off these projects, but not in the way one would think. Much of the wealth comes not from the actual performance of these enterprises, but rather the fees that developers always make when they create the projects. Now, I will say that other people benefit, too. Owners of the Baltimore Orioles and Ravens -- along with the millionaire athletes on these teams -- benefit from the subsidies, and people who actually can afford to watch the teams play are the consumers.
Furthermore, the young people who enjoy living in an urban environment with all of the bars, restaurants, and other amenities, also benefit from the high-profile benefits that people claim will "revitalize" the cities. Here is the problem, however: the main beneficiaries of subsidized redevelopment are affluent whites, from the developers to the young people who populate these "redeveloped" areas.
Without subsidies and political favoritism, these redevelopment projects never would exist, which means that taxpayers are helping to subsidize the lives of some of the most affluent among us. The irony is that for all of the talk about wanting to "help the poor," Progressive whites tend to be the main beneficiaries of the very projects created in the name of creating opportunities for Baltimore's black residents.
But what about the poor? Progressives ask this question all the time, and they also believe they have the answers: high taxes, subsidies, programs, subsidized housing, and high minimum wages. In a recent New York Times column, Paul Krugman declares:
The poor don’t need lectures on morality, they need more resources — which we can afford to provide — and better economic opportunities, which we can also afford to provide through everything from training and subsidies to higher minimum wages. Baltimore, and America, don’t have to be as unjust as they are.Understand that Progressives like Krugman actually are hostile to people who might actually engage in real investment in urban areas, those low-profile entities that create real wealth. Jay Steinmetz, who owns a supply-chain management business in an area of Baltimore not known for its glitz, writes of the real hardships that Baltimore's anti-private enterprise politicians impose on enterprises like his.
City policies and procedures fail to help employers address these problems—and make them worse. When the building alarm goes off, the police charge us a fee. If the graffiti isn’t removed in a certain amount of time, we are fined. This penalize-first approach is of a piece with Baltimore’s legendary tax and regulatory burden. The real cost of these ill-conceived policies is to the community where we—and other local businesses in similar positions—might be able to hire more of those Baltimoreans who have lost hope of escaping poverty and government dependency.The vast majority of the politicians in Baltimore and urban Maryland are chosen by the strange coalition of affluent Progressive whites and low-income and middle-class blacks, and practically none of them actually understand what it is like to run a business enterprise. For example, Martin O'Malley, the recent governor of Maryland who now wants to be the Democratic Party nominee for President of the United States, declared that regulations that impose high costs on businesses have no negative affect on business performance:
Maryland still lags most states in its appeal to companies, according to well-documented business-climate comparisons put out by think tanks, financial-services firms, site-selection consultants and financial media. Baltimore fares even worse than other Maryland jurisdictions, having the highest individual income and property taxes at 3.2% and $2.25 for every $100 of assessed property value, respectively. New businesses organized as partnerships or limited-liability corporations are subject, unusually, to the local individual income tax, reducing startup activity.
The bottom line is that our modest 14,000-square-foot building is hit with $50,000 in annual property taxes. And when we refinanced our building loan in 2006, Maryland and Baltimore real-estate taxes drove up the cost of this routine financial transaction by $36,000.
State and city regulations overlap in a number of areas, most notably employment and hiring practices, where litigious employees can game the system and easily find an attorney to represent them in court. Building-permit requirements, sales-tax collection procedures for our multistate clients, workers’ compensation and unemployment trust-fund hearings add to the expensive distractions that impede hiring.
“It is not true that regulation holds poor people down, or regulation keeps middle class from advancing,” O’Malley, the former governor of Maryland, said Monday in an interview with NPR’s Steve Inskeep. “That's kind of patently bulls---.”Like Krugman, O'Malley believes that the federal government should impose a $15 minimum wage, with the idea being that if government imposes higher production costs, those higher costs actually create more wealth. What they really are saying is that the best way to create a better economic atmosphere in places like inner city Baltimore is to make it more costly for people to create and own businesses there.
Economists are fond of pointing out the perils of imposing "deadweight losses" upon economic exchange, but to people like Krugman and O'Malley, those "deadweight losses" actually benefit the economy because they mean someone must have to spend more money, and spending more money creates wealth.
In order to facilitate this spending, according to Krugman, government must print more money, raise taxes, and borrow and spend. The new spending, no matter what it entails, will boost the economy, employ more people, and make things better for poor people in the inner cities, including Baltimore.
This is nothing but Keynesian Trickle-Down Economics. Spend money on high-profile projects, employ a few poor people, bring in rich young people who can populate the bars and restaurants, spend lots of money, and then impose high costs upon actual businesses that might actually improve the lot of real people who need new opportunities. We can see how well it has worked in Baltimore.