Wednesday, December 30, 2009

Trickle Down -- Revisited

The Reagan years (1981-88) are often described as the years of "trickle down economics." The idea, of course, is that if you make businesses profitable, then good things will "trickle down" to employees. This idea is broadly lampooned by left wing columnists (typically untrained in economics). But, is the idea wrong?

When Reagan entered office in early 1981, the economy was in shambles. Inflation was above ten percent and unemployment was headed in that direction. Eight years later prosperity was rampant. Inflation was low single digits and unemployment was nearing the five percent level. The stock market had risen nearly 300 percent in eight years. Not a bad record. "Trickle down" worked pretty well.

But the left did not like Reagan and did not like the 1980s. Why? What is wrong with full employment and the absence of inflation? Good question.

The answer is that the left has trouble making a case for big government if the economy is doing well and the public is prospering. Nothing makes a left winger more angry than the idea that the public is doing well. That's not good for the left. So, columnist after columnist attacked Reagan as an out-of-touch, senile, and misanthropic politician. But, Reagan didn't mind. He cheerfully continued to talk about America as the "city on the hill" that promoted the individual and saw big government as the enemy. Meanwhile, the economy boomed and "trickle down" trickled down -- full employment and rising incomes for the American public.

The Obama crowd entered office with unemployment at seven percent and growing. Their first order of business was to attack business. Lashing out at "greed and corruption," Obama was quick to put in place pay czars and urge a raft of new regulations and restrictions on business. The Obama agenda promised new taxes, new employer mandates, and an environmental agenda that could easily double utility costs at present usage levels. Obama and his Democratic cohorts seized every opportunity to publicly lash out at business and business leaders.

Banks were forced into a tight noose. Some were given large doses of cash and told what they could or could not do. Other financial institutions faced increased regulatory scrutiny that actively discouraged them from making new loans. The result: predictably lending dried up in major areas of the American economy. If that wasn't enough, Obama pushed Congress to pass punitive legislation on credit card lenders which had the effect of reducing and eliminating credit card access for many Americans, especially those most in need of credit.

In short, in defiance of "trickle down" economics, the Obama Administration and its allies declared war on business. By forcing business to its knees, the Obama folks were moving toward a more just world, not a "trickle down" world.

Well, they have succeeded. If you are able to get and keep a job, you have many more mandated benefits today than last question about it. The problem is getting that job and keeping it.

The point of "trickle down" is that when businesses prosper, they hire more employees, pay them more and treat them better. When business is disastrous, then businesses lay people off, pay them less, and treat them worse. The Obama folks seem to prefer this latter scenario.

The economy is not getting better. Businesses are terrified by the Obama Administration and there is no "trickle down." We need to bring back "trickle down" economics.