Supply Side/Reaganomics/Trickle Down: Does it really work?

My friend Josh and I have a sort of perpetual debate going about the theory of "supply side" economics and whether or not it worked. Neither one of us specialized in Economics, but both of us work in the financial sector (he is an accountant, I am in banking). He contends that it works, and I argue that it did not, as we have been using supply side economics in roughly 20 of the last 30 years.



This post is my attempt at trying to understand supply-side economics.



Basically, supply-side economics supporters claimed that by cutting taxes on the top earners in our society that tax revenues would increase, as well as "trickle-down" to the general populace because the top earners are the ones that create jobs. In essence, supply-side economics cuts taxes to the top earners in order to increase supply, since our society runs on supply and demand.



Proponents used the Laffer Curve to theorize that in order to maximize federal revenue one couldn't go too low with tax rates, nor too high. This is true. But Reagan and his financial advisors (and every following Republican President that has used this since) misunderstood the Laffer Curve, thinking that every tax cut would increase revenue. But that is simply not true. If you decrease taxes too much, revenue goes down. Basically, tax rates were far higher during the Kennedy administration than they are now (50-60% vs. today's 35-40% for top-tier earners). They were cut, and revenues went up. But that was the maximization. It already happened in those days. Reaganomics worked for Reagan. But that was the highest part of the Laffer Curve. Continuing to cut, as Bush 43 did, led to our problems today. But this is just the Federal Revenue side of this.

On the public side of this, or the "trickle-down" side, which contends that increasing the revenues for the highest earners will trickle down into the pockets of even the poorest. The rich business owner will gain more in money, invest more of it into his company, hire more workers, raise wages, and the middle class will earn more, which goes to the Starbucks and McDonalds and to the companies that employ the lower class, and they too will get hired more and increased wages. Sounds great, doesn't it? But it doesn't work out that way in reality. Business owners have always looked for the bottom line. But unlike the '80s, when Reagan employed Reaganomics, when it was better for the bottom line to hire American workers and raise wages to keep them happier at your company rather than the competition's, now it has become cheaper to outsource. "Trickle-down" now longer works. It has become "trickle out."

Keynesian economics, however, advocate the laffer curve as well, but with a better understanding. They too advocate cutting taxes, but to the middle and lower class. This frees up more money in the classes that spend their money more freely. Money circulates more. The tax base increases, thereby increasing tax revenues. On the public side, Keynesian economics, a "mixed economy," is better described as "trickle-up." Sometimes, private enterprises screw it up for the macro-economics of a country, as we saw in last year's meltdown.

Keynesian economics utilizes the private sector pre-dominately, but realizes that once in awhile, the private sector needs guidance from the government and public sector. This is theory that saved us from the Great Depression and brought in the Golden Age of Capitalism (1945-1970). Keynesian economics is still capitalism, folks. It just uses the government to make sure that the economy "trickles-up" instead of down, which works better. It isn't the middle class that outsources. It is the upper-class. I'd take "trickle up" over "trickle out" any day.

Let me know if I missed anything. Again, this is just my non-economist's view of macro-economics.

1942 = 2003

In 1942, on February 19th, Franklin Delano Roosevelt signed Executive Order 9066, which declared that all people of Japanese ancestry were excluded from the entire Pacific coast, including all of California and most of Oregon and Washington, except for those in internment camps. Over 110,000 Japanese immigrants and their US Citizen children were put in housing facilities called "War Relocation Camps" in response to Japan attacking the US at Pearl Harbor. 62% were American Citizens.

Presidential Proclamations 2525, 2526 and 2527 were issued designating Japanese, German and Italian nationals as enemy aliens.

In 1944, the Supreme Court upheld the constitutionality of the exclusion orders.

FBI director J. Edgar Hoover opposed the internment of Japanese Americans. Refuting General DeWitt's reports of disloyalty on the part of Japanese Americans, Hoover sent a memo to Attorney General Francis Biddle in which he wrote about Japanese American disloyalty, "Every complaint in this regard has been investigated, but in no case has any information been obtained which would substantiate the allegation."

Ignoring this, Roosevelt used "military necessity" as justification, because of the threat that Japanese spies could be present and no one would know because they could blend in with those of Japanese descent.

Those in support of this policy argued that nothing like Pearl Harbor happened again. The Japanese were not able to attack any US targets afterwards, and thus these policies "kept America safe" from the Japanese threat.

Years later, in 1988, Ronald Reagan signed legislation which apologized for the internment on behalf of the U.S. government. The legislation stated that government actions were based on "race prejudice, war hysteria, and a failure of political leadership."

In 2003, President George W. Bush, with the help of legal memorandum drafted by John Yoo and Jay S. Bybee, assistant attorney general and legal counsel to George W. Bush, authorized the use of waterboarding on terrorism suspects and "enemy combatants." Other memos authorized the President to disregard much of the US Constitution and its amendments in his "war on terror" after terrorists attacked New York City and blew up the World Trade Center. These memos even authorized the suspension of civil liberties, including warrants, search and seizure, wiretaps, free speech, habeas corpus, the right to a trial, cruel and unusual punishment, and others, for US Citizens if suspected of terrorism.

On November 13, 2001, President Bush issued a Presidential Military Order: "Detention, Treatment, and Trial of Certain Non-Citizens in the War Against Terrorism."

In 2006, Congress upheld that the President could deny habeas corpus to those held as suspects of terrorism, under the Military Commissions Act.

In 2008, the Supreme Court ruled in Boumediene v. Bush, that the Military Commissions Act could not remove the right for Guantanamo captives to access the US Federal Court system.

Supporters of Bush, the John Yoo/Bybee memos, and the policy of waterboarding, argue that military necessity is justification enough to violate the human rights of prisoners accused or suspected of terrorism. They argue that nothing like 9/11 has happened since, and that these policies "kept America safe" from the terrorist threat.

In 2009, President Barack Obama signed an executive order shutting down Guantanamo Bay and granting detainees access to the Justice system. Among other words, this was lauded as progress to reverse government policies based on "race prejudice, war hysteria, and a failure of political leadership."