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normative economics

I am not an economist, nor am I a wannabe economist. Maybe it is something about the apt descriptor “dismal science” that keeps me from delving too deep into a field of study where the experts are as ideologically divided as America’s 113th congress. Maybe it’s the fact that basic algebra is my feeble mind’s mathematical zenith. Either way, I don’t claim to fully understand the intricacies of liquidity premiums or non-equilibrium economics, nor do I really want to.

But I am not a biologist either, and I understand the implications of evolutionary theory. I am not a physicist, but I know why I shouldn’t jump off a bridge. In the same respect, I have come to understand some very basic truths about America’s economic situation and the policies that have shriveled the middle class and hampered economic growth.

My “ah ha” moment came last week when I was reading an article (forgive me for not remembering which; I read quite a few), and the author wrote something along the lines of this: For the economy to get better, people will have to start buying more stuff.

There it was, about as simple an argument as could be. But it was this concise statement that finally allowed me to understand so many other unconnected dots, so many other assertions made by economists and politicians and pundits.  And it was the synthesis of all of these ideas that has now turned my previously tentative support for certain public policies into something more self-assured.

I should disclose that I have always been skeptical of the basic conservative principle of economics, whereby lowering taxes (particularly for corporations and top income earners) is supposed to result in economic growth. Some economists dispute the evidence which correlates America’s greatest period of middle class growth and prosperity with higher tax rates (again, for top income earners and corporations), but here are some general facts to consider:

  1. The income tax rate for the top 1% of earners in the 1950’s was 90%; the rate for these same top earners was 35% when the recession started in 2008, and it is 39% today.
  2. The capital gains tax rate (which primarily affects top income earners) was also 10% higher in the 1950’s than it was in 2008.
  3. The corporate tax rate in the 1950’s hovered between 40% and 50%; in 2008 it was 20%.

I am well aware that correlation does not always equal causation, but I doubt there is no significant relationship between the sustained success of the middle class in the 1950’s and government investments that were concurrently funded in large part by higher taxes on the rich and corporations. I also doubt that the current decline of the middle class and ballooning wealth of the upper class have nothing to do with the lowest corporate/top earner tax rates in the country’s history.

So the fact that America’s middle class was able to thrive under higher corporate and top bracket tax rates is one fundamental reason I reject the conservative philosophy of cutting taxes to promote economic growth. But there is another more basic reason I reject this theory: it relies on an unchecked assumption, a dangerous wishful thought that wealthy people will take their money and invest it in American businesses, and that American businesses will invest in domestic labor, thereby providing jobs for the unemployed and wealth to the middle class and working class. This Rube-Goldberg-esque strategy for growing an economy (also referred to as supply-side economics, Reaganomics, and trickle-down economics) is not only an overly complicated way to accomplish job creation; it was also recently debunked on the most public of stages.

Mitt Romney became a caricature of the 1% during his presidential campaign. The revelation of his offshore bank accounts and the details of Bain Capital’s outsourcing of jobs were not just personal blemishes for Romney, they were direct indictments of the economic principles he was ostensibly representing for the Republican Party. His actions alone serve as a case study proving that the rich do not necessarily reinvest in America, and cutting their taxes will not indirectly result in more wealth for America, just more wealth for them.

Even if someone wanted to discount Mr. Romney’s shady (albeit legal) investment and business strategies as unrepresentative of America’s elite, there is another undeniable trend that contradicts Republican’s key economic philosophy.  Countless studies show increasingly wide disparities between the income gains of top earners versus everyone else.

“The non-partisan Congressional Budget Office reported in 2011 that between 1979 and 2007 the top 1 percent of households saw their income grow by 275 percent, while for the bottom 20 percent, income grew by just 20 percent. For the middle 60 percent of Americans, average incomes grew just under 40 percent.”  http://www.cnbc.com/id/100384824

Now, if there were no significant unemployment to speak of, the exponential growth of wealth among America’s top earners might be justifiable, but the disparity in income growth coupled with current levels of high unemployment instead illustrates that more money at the top does not create more jobs at the bottom. So the attempt to justify more wealth at the top (via tax cuts) in order to stimulate economic growth (i.e. jobs) is without merit.

Back to the idea that “For the economy to get better, people will have to start buying more stuff.” The funny thing about this statement is that it is not just a semi-complete proposal to fixing America’s economy, it would also serve as evidence that the economy is fixed. It is a chicken-and-egg-type paradox that rests on the premise that people (not just wealthy ones) actually have money to buy stuff. Some might even call the statement illogical based on circular reasoning, but as long as there is a way to inject the missing money to the people–so they can buy stuff—the theory works.

We already know how Republicans propose to trickle money to the masses, and keep in mind that their tax cutting strategies would not directly do much good for the 47% of Americans who don’t pay those taxes to begin with. So what are the alternatives?

Some have suggested the Federal Reserve Bank should simply print more money and give it to poor people who are likely to spend it on goods and services from domestic businesses (see here). That could have the effect of creating a demand for more labor and consequently lower unemployment, but the risk of inflation is always a concern when the government starts printing large quantities of money. Even if evidence shows that the risk of inflation is negligible or non-existent (and there is evidence to support this), I doubt this idea of “money for nothing” will ever gain much political traction in Washington.

Chairman of the Federal Reserve Bank Ben Bernanke has been executing a more complicated form of getting Federal Reserve money into the hands of consumers, but his quantitative easing strategy, while thought to be relatively effective at stabilizing the economy, appears to be nearing an end. And since it is not the Federal Reserve Bank’s responsibility to independently determine fiscal policy matters for the country, looking to Bernanke for further solutions is a dead end.

Democrats would almost certainly support higher taxes on top earners and corporations in an effort to redistribute wealth to those who would spend it in this country (rather than sock it away in Switzerland), but the last tax fight was a bloody one and wasn’t much of a win for the blue team. A Republican led House of Representatives is not inclined to pass higher taxes, and Democrats don’t have enough leverage to bend their will.

The only remaining logical option is to get money to the masses in the form of higher wages. Some claim this will result in businesses reducing workforces to cut labor costs, but a sixty year history of minimum wage increases shows no predictable spikes in unemployment following the increases in wages.

The free market has done wonderful things for those at the top, but if growing income inequality means less money to spend for the people in the middle and at the bottom [it does] and a lack of consumer spending is keeping the economy from growing [it is], then the best option for a healthier economy and stronger middle class is higher wages for workers.

With select conservatives currently fighting for the elimination of the federal minimum wage altogether, getting higher wages for workers seems like a tough road for proponents, and it is indeed a road fraught with the usual political roadblocks, like big business’s ill-begotten influence, for instance. Yet there could be a glimmer of hope for this relatively simple solution.

Here’s why:

Republicans are currently engaged in a battle with demographics for the life of their shrinking party. The autopsy of Mitt Romney’s failed campaign led Republican leaders to the conclusion that they needed to make efforts to diversify the GOP, namely through gaining Latino voters with the passage of comprehensive immigration reform. That plan has yet to come to fruition, and like other political issues (take gun control, for example), necessary public support for passing major legislation has a short shelf life.

With minority outreach efforts to save the party dying fast, some pundits have speculated that the GOP can still survive as long as they increase turnout among their base voters. While this temporary form of life support might work, Republicans would certainly need something to offer the working class and middle class Americans that didn’t care enough to vote in the last election. Money, as thousands of years of world history has taught us, would be a sensible incentive.

But the GOP cannot promise any more tax breaks for the working class (who don’t typically pay much in taxes anyway) or the middle class. The immortalization of 98% of the Bush tax cuts was a major win for Republicans last year, so much so that no notable Republican can seriously advocate for more tax cuts that would benefit the working/middle class. It is doubtful that last election’s non-voters will show up at the polls simply to thank Republicans for their past tax-cutting efforts; it is going to take more. It is going to take the promise of higher wages.

Such a promise is in conflict with many of the big business interests which, in large part, fund the campaigns of Republican politicians. However, there are big business interests funding Democratic representatives as well, and there is plenty of support in the Democratic Party for increasing the federal minimum wage. If they can do it, so can Republicans. Doing so isn’t just the only way to save their party; it is also the smartest way to propel the economy beyond its current growth rate.