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Trickle Down

Posted By Russ Roberts On October 6, 2011 @ 8:21 am In Standard of Living,Taxes,The Hollow Middle | Comments Disabled

Jared Bernstein writes (HT: Mark Thoma [1] and Brad DeLong [2])

As I mentioned earlier, I’ve been collecting stuff on kids and their economic well-being.  Here are a couple of figures that provide an intersection of a number of points I’ve tried to stress a lot in recent weeks.

It’s just a simple plot of real median income for families with kids, 1989-2010, followed by two bars showing the trough to peak of income growth in the two recovery periods.

The difference between how middle-income families fared in these two periods is really quite remarkable.  I mean, when it comes to income growth, there are always lots of moving parts, but at first blush, if you’re a middle-income family with kids, you might want to keep these pictures in your mind when listening to the economic agendas of those who would be President.

That is, it’s hard to take seriously those who claim that “supply-side” tax cuts, as in the Bush years—large breaks tilted toward the top that are supposed to trickle down to the middle—will deliver for the middle class, compared to the more progressive tax regime of the Clinton years.  It’s even harder to imagine how “shuddering the EPA” will make the difference.

There were important, real differences between these periods: the job market was much tighter in the former decade, job growth was about four times as fast on an annualized basis—importantly, the 1990s recovery lasted longer than that of the 2000s, in part because the only way for many families to get ahead amidst the flat income growth of the latter period was through cheap, easy credit.  (In other words, there’s a linkage here between flat middle class incomes, the debt bubble, and the big crash.)

And then there’s a graph showing that the median family income fell between 1989 and 1992, grew steadily between 1992 and 2000, then fell or slumped between 2000 and 2010.

Aha! Trickle-down doesn’t work! When Republicans are in power, the middle class suffers! Democrats with high tax rates are good for the middle class!

There is a name for this kind of thinking: post hoc, ergo propter hoc–after this, therefore because of this. Understanding that this is a fallacy, that more than one thing is happening in the world is part of the economic way of thinking. Bernstein mentions this (“there are lots of moving parts”) but he keeps going anyway.

He also wants to sell this idea that we’re going to hear incessantly for the next 13 months that the middle class had to borrow a lot of money because they weren’t getting richer. This is a convenient story that removes any responsibility for the crisis from those who relentlessly encouraged government policies that encouraged debt artificially.

Another way to understand Bernstein’s mistake is remember that correlation is not causation.

I have an even better argument against tax cuts for the rich. According to Bernstein’s logic, they don’t even work for the rich.

If you look at the mean income for the top 20% of all families, it also shrinks between 1989 and 1992, grows between 1992 and 2000 and falls between 2000 and 2010. So those tax cuts for the rich didn’t even help the rich. Kind of ruins the class warfare story, doesn’t it? (I hope to get some graphs up on this in a later post.) The same results hold for the top 5%. Data are here [3]–use the numbers corrected for inflation.

Maybe, just maybe, other factors than tax policy explain our financial well-being.

 

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URLs in this post:

[1] Mark Thoma: http://economistsview.typepad.com/economistsview/2011/10/so-howd-that-trickle-down-thing-work-out.html

[2] Brad DeLong: http://twitter.com/#!/braddelong

[3] Data are here: http://www.census.gov/hhes/www/income/data/historical/families/2010/F03AR_2010.xls

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