Wednesday Dec 02

Money Matters: Tongue Out on a Hot Day, Praying for the Trickle

Trickle-down economics— the very phrase evokes the marvels of gravity imbued in conservative economic “science” promoted by the Chicago school, Milton Friedman, and a raft of others. “Free Market Fundamentalism” as some call it is the idea that we’d all be more than a little better off if we got rid of government, or most of it, and especially the dread “regulation” of how business is conducted. Underpinning much of current rightest politics is the idea developed by Arthur Laffer, and his “Laffer Curve” penned on a famous napkin with a graph purporting to show how a reduction of taxes resulted in more tax revenue because of increased spending on the part of those who would otherwise be writing checks to the IRS. This  tactical suggestion has turned into GOP ideological bedrock such that both our economy and more generally our society are suffering for the inevitable results. Taxation disproportionately affects higher income people, but there is little evidence that cutting taxes results in “job creation.” Most savings from Trump’s tax cut simply went to stock buy-backs that increased share value, thus benefiting executives and shareholders, not workers.

Greed, it turns out, may be more powerful than gravity.

Nick Hanauer, probably the most progressive “nearbillionaire” I’ve ever met, has been battling this concept of “trickle down” economics for years. At times, it has landed him in hot water with the likes of the TED community where he famously argued for a higher minimum wage and higher taxes on the 1%. His frank responses to “trickle down” are among the sharpest. Here’s where he starts:

The thing about us businesspeople is that we love our customers rich and our employees poor. So for as long as there has been capitalism, capitalists have said the same thing about any effort to raise wages….We’re all going to go bankrupt. I’ll have to close. I’ll have to lay everyone off. It [just] hasn’t happened. In fact, the data show that when workers are better treated, business gets better. The naysayers are just wrong.

Nick garnered more than his share of attention when he backed the $15 minimum wage in his hometown of Seattle, an effort that succeeded far more quickly and easily than any had thought possible. Now, like many successful investors, Nick has expressed various degrees of alarm about the Occupy movement and its aftermath:

…many of our fellow citizens are starting to believe that capitalism itself is the problem. I disagree ... Capitalism, when well-managed, is the greatest social technology ever invented to create prosperity in human societies. It can be managed either to benefit the few in the near term or the many in the long term. The work of democracies is to bend it to the latter. That is why investments in the middle-class work. And tax breaks for rich people …don’t. Balancing the power of workers and billionaires by raising the minimum wage isn’t bad for capitalism. It’s an indispensable tool smart capitalists use to make capitalism stable and sustainable.

Where Hanauer falls analytically short is in his notion that a higher minimum wage in low-skill jobs can lead to a middle-class life. It doesn’t. $15 an hour produces about $30,000/year, just over 10% above the federal poverty line for a family of four. To put a finer point on it, Medicaid coverage is for people earning less than 138% of the federal poverty level and SNAP (food stamps) is for people at 130% of the line. More notably, Obamacare gives tax credits for people buying policies if they earned less than 400% of the federal poverty line. Fact remains: low earners still struggle for the basics which is no surprise to the myriad cities contending with an upward spiral of homelessness.

Now a few years back, many fought for a “living wage” and developed a variety of ways to calculate this based on local economies. In San Francisco, for instance, a living wage for a single parent of one child is $40.53/hour, more than 2.5 times the $15/hour so many continue to fight for (and should).

As they always seem to do, Republicans in power cut taxes. The most recent example is Trump’s “Tax Cuts and Jobs Act” passed in 2017. It was designed to save corporations and the 1% hundreds of billions, and the Laffer-able prediction was that wages and job creation would follow the windfall. But as of December 2019 — months before Covid-19 was even part of our daily conversation, the results were at best poor. According to Michael Linden writing for CNN from his perch at the Roosevelt Institute, in that month, job creation had dropped from pre-cut monthly averages of over 200,000/month to just 11,000/month. And promised average bluecollar wage increases of $4000/year came in at about $400.

So as we entered our current dire and deeply uncertain period, very little was trickling down to wage workers, tax revenues declined and deficits rose (despite reduction of the federal budget being a cannon of GOP gospel). And then….Covid-19 appeared. Even without the inept White House response, and Mitch McConnell’s affinity for the grim reaper as a role model, it was a bad confluence of circumstance.

It’s worth focusing on this financial landscape now for the obvious reason that we have, for the first time since the Great Recession in 2008, entered into a recession the depths of which we have not yet plumbed. And since Covid-19 is creating something quite apart from the normal “business cycle,” which tolerates regular recessions, who knows where we are going to end up with this one. Historical “Black Swan Events” like the 1918 Spanish Flu pandemic (that really started in Nebraska and was carried to Europe by US soldiers in WWI) offer few if any guideposts to our present crisis. Globalization of supply chains, fluid travel, and growing immigration are accelerators one didn’t see a century ago.

A brief recession (10% off market highs) needs up to 10 months for a recovery to emerge; a bear market (20% off of market highs) can last twice as long, and we hit that in April. A depression, in contrast, lasts for years and creates a grinding cycle of low or no job growth, declining wages, and a moribund market for consumption. Assets actually decline in value (deflation), further tightening already bound-up credit markets. But where are we now? The stock market has largely recovered in late summer despite huge unemployment and looming federal deficits. There are simply no guideposts for the current economic landscape.

This continuum from brief recession to the mire of economic depression is what concerns many in Washington, and is why, with remarkable speed, and very unlike Hoover’s tepid response after 1929, there was in the spring a bi-partisan approach to literally throwing money at the problem, federal debt be damned regardless of GOP rhetoric for 40 years. But now, in the beginning of September, this bi-partisanship has completely disappeared as we head into the election cycle. And, while many including Treasury Secretary Mnuchin and Fed Chair Powell argue for more stimulus, Senate Republicans and the White House are frozen in the Grim Reaper’s pose. The best they can come up with is to postpone payroll tax collection (not the obligation) so as to trick wage-earners who still have a job into thinking they are getting an additional break. Trump has stated his intention to make this key funding mechanism for Social Security go away permanently if reelected. It is a testament to his ability to distract with tweets about unproven conspiracies that this story shows up on the back pages if at all. The Dems are missing this absolute gift of a political issue for reasons one cannot fathom. Nonetheless, the demise of Social Security may well end up a central accomplishment of a second Trump term.

Two things are remarkable about this political moment. First, as fate would have it, Republicans have found themselves in charge of a government that they’d been trying to slowly dismantle for years, but which is now the indispensable mechanism through which ANY attempt to curb the downturn must rely. Second, the timeframes for containing the virus and the process of federal intervention in the economy needed re-stimulate the economy are at best out of sync. At worst, the former overwhelms the latter. If Republican’s retain either the White House or the Senate, we will likely see a repeat of an inadequate stimulus as in 2008, 2009 when the banks and auto companies got bailed out, but homeowners and wage earners didn’t and got stuck with the bill. I mean really: Jamie Dimond is STILL running JPMorgan, one of the institutions that arguably caused the 2008 Recession. And, having helped lead the exploitation of hundreds of thousands of homeowners back then, and accumulating an estimated $400 million (per CNBC 5/19/2020), he is NOW saying this: “The last few months have laid bare the reality that, even before the pandemic hit, far too many people were living on the edge.” Really? What exactly did he think was happening over the last several decades as he raked in ungodly sums of executive compensation? What confronts us now is an unemployed population of 36.5 million and rising and 40% of ALL households earning less than $40k/year are suffering job losses.

This virus will likely take years to contain, even if a vaccine is found. Larry Brilliant, the remarkable epidemiologist, reminds us frequently that it took over 150 years from the discovery of a vaccination to the eradication of smallpox — an effort that he led to its amazing, successful end. Polio — a scourge of the mid-20th Century — took decades to marginalize since vaccinations were discovered in the 1940’s and 50’s, and it still re-ignites to this day. Eradication is the goal, but success, even in the 21st Century seems elusive.

So, we end up with the Keystone Kops who hate the engine they alone steer, while driving to the fire with a philosophy of “trickle down” economics as their mantra. Not likely to make a dent. But, what would?

There is a premise in many traditions that calamity, disaster, or upheaval CAN (but not will) lead to remarkable and deep change. Even Mr. Dimond argues, “It is my fervent hope that we use this crisis as a catalyst to rebuild an economy that creates and sustains opportunity for dramatically more people, especially those who have been left behind for too long.” What is possible now that we have been struck with such a monumental blow to society as we knew it?

What seems a possibility — though a very remote one — is for a fundamental shift to occur that opens the door social policies designed to help working people gain stability and security in these most unstable times. Some version of healthcare for everyone combined with some version of Andrew Yang’s Universal Basic Income along with far more generous (and lengthy) unemployment benefits. To do this, corporations and the 1% are going to have to give up far more than the Trump tax cuts. For the tax year of 1939 — a full year before the US joined World War II, taxes on the highest earners hovered around 79%. That’s what it was costing the wealthiest to help the country battle through the Great Depression. Few, of course, really paid that much, but it does help one conceive of what some kind of deep structural change in federal taxation rates might look like.

If we were magically able to get there, one can imagine more than a trickle might begin to move down the economic stream to those who really, actually need it.

DRUMMOND PIKE, a frequent Organizers’ Forum participant and contributor to these pages, was the founder and CEO of Tidesmin San Francisco, and continues to be involved in philanthropy and social change.

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