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Reaganomics

The Failure of the Supply Side or so called ‘Trickle Down’ Economic Theory


Especially since the election of Ronald Reagan in 1980, and for some time prior to that, various entities have put forth with vigor the above mentioned theory. Unfortunately, it has gained wide acceptance among a large number of intellectuals, politicians, pundits, etc. and has even been supported in a variety of the media both broadcast and print, as well as more recently the blogosphere. For the purpose of further clarification, let’s take a critical look at what it really is comprised of (the theory) and its validity. As in previous articles by this author, the historical narrative approach is best utilized for this analysis. It will also be necessary to compare it on occasion, with results of the opposing theory, that of “consumer-driven” or bubble up economics.

The first time of significant record that the trickle-down theory failed was the panic of 1893. This depression was more serious than earlier panics of the ‘gilded age’ and before. It required massive infusions of cash into the banking system by the mega rich of the age, such as J. Pierpont Morgan, to bring it under control. This was also the age of unfettered child labor and the historical ‘sweat shops’ of the time. This was followed by another minor panic in 1896, primarily caused by a drop in silver reserves and the effect that that might have on the gold standard. Unions were, for all practical purposes, only in their early formative years and offered little, if any protection to workers. The panic subsided to a degree when President McKinley was elected but was not really brought under control until the ‘trust-busting’ reforms of President Theodore Roosevelt. After WWI, however, business was back in business, so to speak, and the decade of the Roaring Twenties began. Fueled by easy money, banks and other institutions began an unregulated process of financial speculation that eventually lead to the crash of 1929 and great depression. In fact, when questioned about the volatility of the markets by some economists of the time, President Hover would reply, “The business of America is business.”

Now, let’s take look at a couple of prominent businessmen of those times who foresaw the failure of supply side and made attempts to do something about it. The first is a name familiar to all – Henry Ford. In January of 1914, he announced that he was raising the pay of his assembly line workers to five dollars per day. That was nearly three times what the average factory employee was earning at the time. He was labeled a socialist and a madman among other derogatory terms. The Wall Street Journal even stated that he was committing an “economic crime”. However, the higher wages turned Ford’s workers into consumers who later could afford the $575 to buy a Model T. His company profits went from $25 million at that time to $57 million two years later. Henry was no socialist or madman; he was a smart capitalist who utilized the Consumer Driven or ‘bubble up’ economic theory to his advantage.

The second name, not as familiar however just as significant, is Marriner Eccles. Eccles was born in Utah in 1890. His father had emigrated there from Scotland some time earlier and had become a successful and moderately rich business man. At age 22, with his father’s assistance, he became a bank president. A few years after, he became a millionaire, and by the age of 40, he was head of a bank holding company controlling 26 banks, as well as owner of many other successful businesses. During the Crash of 1929, his businesses were diverse enough and his banks adequately capitalized that he was able to weather the financial storm. His fellow businessmen were assuring him that this was only a temporary setback and that soon the economy would right itself on its own. In fact, many prominent businessmen and financiers of the time such as Bernard Baruch; W. W. Atterbury, president of the Pennsylvania Railroad; and Myron Taylor, chair of US Steel were counseling that the governments only responsibility was to balance the budget, reduce the deficit and stay out of the way. As the years past and a recovery didn’t happen, Eccles began to question these premises.

Eccles, being a prominent businessman of the time, was called in February of 1933 to testify before the Senate Finance Committee. The committee was holding hearings to determine what, if anything, could be done to resolve the financial and economic crisis of the time. Rather than going into a lengthy explanation of how MarrinerEccles had come to the conclusion he presented to the committee (All of which can be found in the excellent book Aftershock by Robert Reich), a summary of his testimony follows. Contrary to what many of his peers had advised, he told the committee that the government needed to invest in public works projects to put people back to work, federal and state relief for the unemployed, refinancing of mortgages, a federal minimum wage, federally supported old age pensions, and higher income and inheritance taxes on the wealthy. He felt only when these recommendations were implemented could the economy be fully restored.

Surprisingly, in December of 1933, he received a telegram from Henry Morgenthau (Franklin Roosevelt’s Secretary of the Treasury) asking him to come to Washington to talk monetary matters. To make a long story short after several months of consultation with treasury and other government officials, many of his ideas were incorporated in the Roosevelt New Deal recovery program, which helped to end the Great Depression. In fact, in 1934, he was appointed Chairman of the Federal Reserve, and continued in that position for 14 years.

The period after WWII through 1975 was a period of great prosperity. It’s important to remember what happened. Thousands of service members were coming home and utilizing the GI Bill to get college educations. Blue-collar workers were reaping the benefits of good union contracts which gave them a good standard of living, health and retirement benefits and purchasing power which helped to drive a vibrant economy. As an aside, let me remind any readers of this article who think that unions are corrupt and full of gangsters that during this period of time union corruption and gangsterism were being prosecuted at the highest levels by a liberal US attorney general. Because of this vibrant economy, corporations did very well financially also, were able to open new factories and expand, and at the same time pay their top executives well. Because of social security and Medicare (enacted in 1965), poverty among the elderly was cut in half. The interstate highway system revolutionized the transportation system by radically reducing the cost of moving and transporting goods and services around the country, and creating a vibrant trucking industry. We landed men on the moon and science flourished. Science fairs abounded and students rushed to study it. Science was respected and not repudiated as it is today. This was a period of time when the ‘consumer-driven’ or bubble up economic theory was being widely utilized. In fact, President Nixon even purportedly claimed in 1971, “We’re all Keynesians now.” Clicking on the upper graph illustrates how productivity and wages rose simultaneously during that period of time.

This now brings us to 1980, when due to the efforts of a group of supply side intellectuals (as well as political right wing and libertarian propaganda) and various problems with consumer driven economics, which had not been correctly addressed by previous governmental actions, caused the country to shift its attitude, and become more open to the supply side theory. The champion of this theory was of course Ronald Reagan, who won the presidential election of 1980.

Now even though Reagan talked the supply side talk (“Government isn’t the solution to your problems…it is the problem”), he turned out as President, to be more of a conservative pragmatist than ideologue. He called the Soviet Union an “Evil Empire,” yet negotiated with Premiere Gorbachev to ease cold war tensions. Many of the programs enacted during his time in office reflected a repair, rather than an end to federal programs. The revision of social security, to make it more workable; and the income tax reform are two primary examples. In fact, he utilized what were called at the time “revenue enhancements” basically closing tax loopholes or actually raising them, some eleven times. All of this was done in a bipartisan manner with a democratic congress led by house speaker Tip O’Neal. Too bad that’s not happening today AND: today those kind of compromises would be an anathema to radical conservative supply siders like Grover Norquist and Eric Cantor, among others.

Now, even though many supply siders of the time, saw the growing economy as a sign of success for their methodology there were a variety of reasons why consumers continued to spend and grow the economy during this period which were in no way related to the supply side theory. Space in this article precludes me from presenting the many pages it would take to enter all of the pertinent information, which would include a series of financial and corporate deregulatory legislative actions that culminated in the repeal of the “Glass Steagall” act. At the time, most conservatives considered that it (Glass Steagall) had outlived its usefulness.  As you can see from the graph some paragraphs above, during the late seventies, even though productivity of workers continued to rise, their compensation for it flattened out. In order to raise their purchasing power and continue to grow the economy, three primary coping mechanisms were used by the middle class. When these coping mechanisms were exhausted, and Wall Street high jinks occurred during and prior to 2007, the game was up. In fact, the economy grew not because of, but in spite of the trickle-down economic theory.

Mechanism #1:  Women went to work-  In the late 70s and with increasing numbers during the next three decades the female workforce increased statistically as follows. In 1966, 20% of mothers with children worked – by the 1990s that had risen to over 60%. For mothers with young children under the age of six, the figures are 12% to 55%. Due to the decline in manufacturing jobs and increase in service sector jobs, openings for women significantly materialized. Other factors such as the advent of the birth control pill, and subsequent family planning, also made it easier for women to enter the work force, therefore making many families two income families.

Mechanism #2:  Working longer hours – By the mid-2000s, many men were working over 50 hours per week and women over 40. White collar workers were putting in more billable time, while blue collar workers were relying more on overtime. Where Mechanism #1 wasn’t working, folks would take on part time second jobs demanding 20 or more hours per week. By the middle of the decade of the 2000s, a typical American worked 2,200 hours a year, 350 hours more than the average European and even more than the industrious Japanese and Korean workers. The average American family was working 500 hours more a year than it had in 1979.

Mechanism #3:  And this was to become the most lethal of all for the American consumer.  Drawing down savings and borrowing - At the time of the great prosperity, Americans saved on average around 9 percent of their after tax income. By the1980s, it had dropped to 7 percent and 6 percent in the 90s. In 2008 it was 2.6 percent. The borrowing trend was assisted by the Federal Reserve’s policy (under Allen Greenspan) of lowering interest rates (supposedly to prevent inflation), and by the large influx of credit card into the marketplace. Anyone who could stand up straight could get a credit card. Many folks carried a dozen or more in their wallet or purse; and since housing prices were going up, second and third mortgages were becoming popular. Household debt during the years of the great prosperity had averaged 50 to 35 percent (including mortgage dept) of after tax income. By 2007, that had increased to 138 percent of after tax income.

There is also another interesting idea that has been put forward by several prominent economists to include Paul Krugman and Robert Reich among others. Their idea asserts that when too much wealth is concentrated in the hands of a few and not distributed throughout the society as a whole, the whole society cannot benefit and economic instability occurs. This also reflects the thoughts of Henry Ford and Marriner Eccles as described earlier in this article. The following graph illustrates this point.



One can compare the timeline to the eras of the great depression and the current great recession.

Now to those of you reading this who would like to call this class warfare, please remember that when all of society benefits those at the top of that society also benefit even more. Nothing has been taken away from them. In fact, as demonstrated by the Henry Ford example, in practically all cases the upper income folks benefit more than they otherwise would without a well to do middle class.

To those of you who want to say things such as “Well, Steve Jobs is the true example of a job creator”. Yup, you got it right, He sure did create lots of jobs: IN CHINA. And you can’t blame him. Your iPad or iPhone would cost triple of what it does now if it were manufactured in the US. If US workers were paid the same as Chinese workers (as Michelle Bachmann thinks they should) they wouldn’t be able to survive. It’s called “cost of living”. Sorry, but that’s globalization and we’re going to have to live with it like it or not.

Let’s add another interesting graphic from the October 18th, 2010 issue of Newsweek magazine which also illustrates the failure of the Supply Side / trickle-down theory, which you can see clearly if you click the image.
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With regard to the supply side’s most recent failure let’s quote congressman Paul Ryan (current author of the so called “Ryan Plan” to solve America’s economic problems) during the time frame when Hank Paulson, a Republican Secretary of the treasury was proposing that congress pass the TARP [Toxic Assets Reduction Program] at the start of the most recent economic meltdown. “This program violates every one of the principals of my free market philosophy but I’m voting for it to save the country.” Now when every principal of one’s philosophy (trickle-down economics works, businesses and financial institutions can self regulate) needs to be violated in order to save the country, most folks would surmise that it would be time to rethink that philosophy. Go Figure.

Now in spite of all the rhetoric being generated by both presidential campaigns thus far, the real question in November of this year should be “Which system works best?” Trickle-down or bubble up? The historical evidence should be obvious. As George H. W. Bush (Bush I) called it in the 1980 Republican primary season, “Voodoo Economics”.

As mentioned by this author in previous articles, we can barely scratch the surface of this debate in so few paragraphs.

To get the real picture of how “trickle-down” economics works click here.


Author’s Note: For further readings please check out the following references from which most of the research for this article was obtained and liberally quoted from. Aftershock, The Next Economy and America’s Future by Robert Reich. 23 Things They Don’t Tell You About Capitalism by Ha-Joon Chang. The Gardens of Democracy by Eric Liu and Nick Hanauer and the classic book for a real in depth look at Supply Side vs. Consumer Driven is the book by Nicholas Wapshot:  Keynes / Hayek, The Clash That Defined Modern Economics. As in all previous articles by this author an extensive bibliography as well research notes are available upon request.


Raymond “Gene” Gerth spent 22 years on active duty with the US Army. Eight years and four months of that time were spent stationed here in the ROK. After his retirement from active duty, he spent another twelve years as a Procurement Analyst for the Eighth Army’s MWR division at their headquarters in Seoul and worked as an Adjunct Assistant Professor at the University of Maryland’s University College. Prior to his government service, he was a public school teacher in three different US states and managed his own Entertainment Booking Agency “Musicians Services Limited”. His political activities prior to his military service included serving on his local precinct election board as a poll judge.


The views of the writer are his own and do not necessarily reflect those of Haps Magazine.


If you would like to get in on the political discussion, Haps welcomes all submissions.



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About Gene Gerth

Retired US Army, Retired Eighth Army Entertainment Director, Former Adjunct Assistant Professor - University of Maryland University College Asian Division, Busan City Chapter Chair - Democrats Abroad ROK

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