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Economist bombshells supply-side economics

By Annabel Perkins

During the 1980’s the US economy became more and more unequal in its income distribution. It ranked top among industrialized economies in terms of widening inequality during this period. Top federal income tax rates fell from 50 to 28 percent of gross income, while earners in the bottom deciles actually paid higher federal tax rates and became poorer not only in relative, but absolute terms.

The reason?

The legacy of supply-side economics, whose supporters insist that reducing income taxes for the rich and shifting the tax burden to the middle and working classes will benefit the economy.

The supply-siders have convinced three successive presidential administrations that if the rich pay lower income taxes they’ll have a bigger incentive to work harder, save and invest more, and thereby cause the economy to grow. As a consequence, prices will fall and employment will rise. The economic pie will get increase, and everyone can have a bigger slice.

The outcome?

According to Barry Smeeding at Syracuse University, the worst income inequality in the developed world, with rising rates of child poverty any civilized country should be ashamed of.

And remarkable rates of growth?

No. Investment rates have not risen significantly as a result of the tax cuts, because the top earners in the U.S. prefer to spend their money boosting their affluent lifestyles.

Unpsychological economics

Bob Frank, professor of economics at Cornell University, can explain to the supply-siders why the policy was such a failure. His logic is simple: the more money the ‘winners’ or the top-paid people in the U.S. economy earn, the more tempting it is for the rest of us to try to enter the race to be a winner.

When we do that, we not only lower the odds for all our competitors, but at the same time we neglect more mundane activities that are actually more socially useful. After all, who wants to be a corn farmer in upstate New York if there’s a chance (even a very tiny chance) of earning a million a year by going to law school?

The result is that the economy gets skewed, too many people end up wasting their time chasing a few big prizes that only a handful of people can win. This leads to a reduction in people producing those less glamorous goods and services which the economy needs more acutely.

According to Frank, "This inefficiency would occur even if people were able to assess accurately their odds of winning the big prizes, yet psychological research shows that most people actually substantially over-estimate their chances of success in a winner-take-all market. The people who are able to realistically assess their odds of winning are in most cases the clinically depressed."

He adds: "This phenomenon is just human nature. For example, in one survey of attitudes to their driving skills, 90 percent of respondents thought themselves ‘better than average’ drivers."

Frank’s solution to the problem?

"Tax the winners’ salaries to discourage people from entering the contest. In other words, tax the rich to make the economy grow faster."

Is anyone listening to Frank?

Not yet, at least not openly. Speaking out in favor of raising tax rates for the rich is still political suicide in the U.S. But the results of supply-side economics are causing social tensions to pile up and making the inner cities in the U.S. more ugly places to live in.

According to a recent report in the Guardian Weekly, large numbers of people living in New York City’s ghettoes can now no longer afford the energy necessary to cook food, heat, or even light their homes through the winter.

Meanwhile, the middle and upper classes are steadily retreating to ‘fortress communities’ within which schools, businesses and recreational facilities operate behind tight shields of surveillance security.

But some Congress members are starting to have the foresight to realize that such high levels of inequality and poverty are unsustainable.

Recently Frank met with a group of senators from the Democratic party to discuss his model of the economy.

"Congress is considering introducing a consumption tax" says Frank, "and the congressional candidate for Fairfax, Virginia is very interested."

Frank seems optimistic that the idea of introducing at least consumption taxes for the rich is picking up momentum. Rather than squandering their incomes, a tax on consumption would give the highly-paid more of an incentive to make the savings and investments the supply-siders still believe are the solution to make the economy grow faster.

It would at least be a step in the direction towards the social and economic stability that the world’s most affluent and powerful country so desperately needs.

Copyright Proutist Universal 1999