Whatâs
Wrong Today:
As the
chart below from the Federal Reserve Bank of St. Louis (FRED) shows, after-tax
Corporate Profits (blue line) are at all time highs. The Wrongologist graphed
wages (red line) as a share of GDP on the same graph, the left axis is
corporate profits, the right axis, wages as a share of GDP:
It doesnât
require a degree in economics to see that corporations have done very well and
individuals not so well. So, when we spoke yesterday about how some economists
are recycling old theories to support
current fiscal policy in a fact-free context, here is a little context
for the rest of us.
As you
look on the above chart before the big recession, even the pre-crisis corporate
profit picture was very rosy. The chart isnât overlaid with the effective
corporate tax rate, but, below is a chart of corporate taxes as a percentage of
GDP since the 1950s:
Most of
corporate Americaâs productivity gains over the last 10 years have been the
result of stagnant wages, and corporate tax breaks. The net-net is that the increase
in corporate profits is largely due to lower wages, lower taxes and corporate
welfare.
So, now letâs
close those tax loopholes and get corporations to pay their fair share.
Looking at
the first chart, we see a 9-fold increase in corporate profits since 1980
compared to flat wages since 1989, so, it might be time to ask where is the
trickle down? The answer is: It went
to workers in China, Mexico, India, executive salaries & offshore corporate
cash hoards.
Recently,
the GOP has stopped using the term âjob creatorsâ, which had replaced the
previous âtrickle downâ. Now the question is whether the GOP believes they can
simply create a new term to convince enough voters that low taxes on
corporations and the wealthy are acceptable to the rest of us.
Every major economist
has espoused the âlabor
theory of valueâ. That includes the conservative Adam Smith, who wrote of
the “Invisible
Hand”, which is a metaphor
to describe the self-regulating behavior of the marketplace. It has come to reflect
Smithâs claim that individuals’ efforts to maximize their own gains in a free
market will also benefit society, even if that individual has no benevolent
intention.
The labor theory was
also at the core of the writings of the left-leaning Karl Marx.
One corollary of the labor
theory is that if “realâ wages that should be going to labor decline in a period of growth, the difference will
flow upward to the corporations and their executives.
We have ample
evidence that wealth does not âtrickle downâ to the working class. Our first
chart demonstrates that.
“Supply Side Economics”
says that lowering taxes and regulations would drive economic growth. It was a
con promulgated by the economist Arthur Laffer. Mr. Laffer
is remembered for his “Laffer
Curve“, which purportedly
demonstrates that taxable income will vary inversely with changes in the
rate of taxation. That means that lower taxes produce higher tax revenues, and
vice versa. Laffer said it
illustrates the theory that reducing taxes for the very wealthy would result in
increased production and thereby, tax receipts. Lafferâs theory of trickle down
was immediately embraced by the GOP, who claimed that by cutting taxes for opposite
has occurred.
Since Ronald Reagan occupied
the White House, the GOP has peddled the idea that tax cuts that benefit only
the elite classes would achieve big economic gains. It hasn’t worked. By now,
even the GOP knows that ‘trickle down” or “supply side
theory” is bunkum. They will, however, will always resurrect it if they can milk it for another tax cut.
We need
companies to realize both their operations and society would be better
sustained over the long run if they started to re-invest more in their
companies and their workforce. Whether itâs more pay, fewer hours and more employees,
something has to give. If 10% of current profits were diverted to workersâ
wages, there would be an additional $182.14 BILLION (1.16% of GDP) in the
pockets of consumers who are more likely to spend that cash rather than hoard
it.
Windfalls/tax cuts are
never re-invested in ways that create jobs. They are squirreled away offshore
or, otherwise removed from circulation. The results are obvious: a slow down or
a recession eventually has followed every GOP tax cut.
Is this GOP record of
lowering taxes to create jobs, and getting the opposite simply a fluke?
Not a chance. It is
the predictable outcome of economists backing bad fiscal policy with quack
theories.
Good points. Yesterday on MSNBC an economist pointed out that if the top 14 hedge fund managers paid tax on ordinary income and not carried interest, that would amount to $3Billion and would pay for much of the recent reduction in food stamps. And foodstamps become direct spending in districts, so if reduced that reductions is expressed either in grocery purchases or in some other consumer spending. our republican experts have lied to us and we keep listening.
by the way, as someone who has read Adam Smith, I want to report that Smith did not believe that a person could pay another less than a living wage. he was wrong of course.