The Mid-Term Elections and the Failure, Yet Again, of Trickle-Down Economics
This week’s seismic shift in the Congress will not change the problems facing its members and the President. This is the third consecutive election to bring large losses for the party in power, all for the same reason. For a decade, neither party has been able to deliver the rising incomes and economic security that matter most for average Americans. For all of the stark differences between the Bush and Obama presidencies, these economic results and the political outcomes that have followed are less surprising than one might think. That’s because the Obama administration, despite its rhetoric and efforts, finds itself backed into a version of the same, failed trickle-down economic model that its predecessor embraced openly.
Yes, the last two years of Democratic dominance produced small gains in jobs, especially compared to the massive job losses at the close of Bush’s term, and modest gains in incomes compared to stagnating wages under the Republicans. Like his predecessor, however, Obama now presides over an economy that continues to produce much greater gains for those at the top. While most Americans are struggling, corporate profits are up sharply, and the stock market has recovered all of the ground it lost in the financial crisis and its aftermath. Perhaps most galling, Wall Street is preparing to hand out another round of mega-bonuses, dismissing the fact that they were the ones who brought down the economy for everyone else, and that the average people who bailed them out aren’t sharing in their private boom.
Most Americans accept, at least intuitively, that the financial bailout ultimately saved everyone from a much worse economic fate. But the public’s anger tells us that voters also sense that Wall Street’s rapid return to good times wasn’t accidental. They’re right: Once again, Washington made the restoration of big profits for Wall Street the lynchpin for a broader recovery. The key was the administration’s decision, once further stimulus to directly support average people seemed to be off-limits, to embrace the indirect approach of massive, ongoing monetary stimulus. Its principal element was open access at the Fed for big finance to borrow funds at near-zero interest rates, which the administration’s economic team hoped would jumpstart business investment and large consumer loans.
In practice, Wall Street didn’t use much of more than $1 trillion in nearly-free money to expand business lending. With consumer spending sidelined by high unemployment and the still-falling housing market, demand for business loans remained slow. Moreover, once the big financial institutions were safely bailed out, they used their unlimited and nearly-free funds from the Fed to buy U.S. and foreign government securities and other safe instruments, generating the large profits that now fund their bonuses.
This trickle-down approach has been further amplified by the Fed’s “quantitative easing†program. That’s their latest effort — the second time in two years — to get the trickle going by buying up to $1 trillion in nearly any long-term assets that Wall Street wants to unload. It hasn’t worked yet: Last week, the report on third quarter GDP showed that most of the tepid, 2.0 percent growth came from inventory buildup, while final sales slumped. So long as the trickle doesn’t reach most Americans, the Fed’s efforts won’t work politically either.
In fact, there were alternatives — and there still are. A more effective approach, for both the short and long terms, would link immediate new spending and tax reductions for most Americans with long-term entitlement changes to control deficits down the line. Given the scale of the economy’s current troubles, this is an opportunity for the administration to think big — for example, a multi-year payroll tax holiday and new light rail systems for the nation’s 30 largest metropolitan areas; new research initiatives on the scale of the moon shot for green fuels and technologies and medical breakthroughs; or free tuition at public colleges for students from families earning less than $120,000, an approach now in place at Harvard and other elite universities.
Perhaps most important, the economy needs a federal loan program for families with mortgages in trouble to help stabilize housing prices by keeping foreclosure rates in check. Such a measure could short-circuit much of the “negative wealth effect†from falling housing prices, which continues to hold down consumer spending and, with it, business investment. Yet, when one loudmouth on cable TV ignited a rightwing cry against direct federal assistance to keep people in their homes, who among the Democrats had the gumption to refute him?
What approaches can we expect from the Republicans who will run the House of Representatives? Their leading proposition is to extend the Bush tax cuts, on the view that you don’t raise taxes in a weak economy — and they’re basically right. Of course, they also want to cut current spending, which would slow the economy more than restoring the Clinton-era tax rates for high-income people. The truth is, most Republicans are all talk on the deficit. Apart from Paul Ryan and his handful of true-believers, the GOP is probably no more willing today to pull back current pending for any sizable group or interest than they were under George W. Bush, when federal spending grew at the fastest rate since LBJ.
Yet, there may be opportunities to agree on something beyond the expected, temporary extension of the Bush tax cuts. President Obama can begin by going beyond trickle-down and pressing for major initiatives to directly help average Americans, including payroll tax relief and mortgage loans, linked to long-term spending reforms for the entitlement programs. If the Republicans refuse, that’s a debate the President should welcome as he prepares his run for reelection.