Current economic debate: a secret decoder ring

Politics now days is the era of sound bites and so these are attempts to reduce complex subjects into something that is can be recognized but yet contrasted to a candidate’s opponent. If you’re like many you’re wondering about the frenzy and debate around two phrases:

  • Trickle down economics (really supply side economics)
  • Middle class out economics (really behavioral economics)

What are the core ideas behind each concept, you might ask? These are not just phrases invented on a whim and each have some depth that I hope to share with you in as unbiased a fashion as I possibly can. I specialized in Finance as part of my MBA, not that fact should impress you but that I have formed my own conclusion after considerable study, albeit mandatory study lol!

Trickle down economics was used widely during Reagan’s run as President but is attributed as a theory much earlier than that. Today it is used as a pejorative (negative comment) and summarized as the “failed economic policy of the previous 8 years”. Ironically looking at history, Reagan nor Bush ever used the phrase to describe their own policy. A more accurate phrasing of the Reagan’s core economic policy is what’s called Supply Side economics but that’s not as catchy so rarely used. It’s core concept is around the idea that tax breaks lead to an increase in capital formation which then leads to job creation and hence top to bottom trickle of economic activity. One of the central changes was the reduction of long term Capital Gains tax from then 35% to 20% (today it is 15%). The following 10 years after this change saw an enormous level of job creation and economic expansion. The reduction of capital gains resulted in an increase of tax receipts through an effect called expanding the base. In other words more people participated because of lower rates creating a net positive even though a single individual would pay less in tax.

Middle class out economics is a new phrase adopted by the Obama campaign but is nothing new. He’s been using this approach since his first days in office back in January 2009. The policy is more accurately referred to as Behavioral Economics which sounds ominous so they have to call it something else. The economic theory does mean actually what it says with the core concept that people act irrationally and motivated by emotion and so it is the policy to entice behavior. If you’d like to get a survey of the concepts check out the book “Nudge” by Cass Sunstein and Richard Thaler. Yes, that’s right the same Cass Sunstein on Obama’s Regulatory Czar until just recently. The NY Times did a piece on this policy theory in an article back in 2010:

A quote from the article that summarizes this economic approach is this: “But in the real world, Sunstein and Thaler argue, people are subject to all sorts of biases and quirks. They also argue that this human quality, which some would call irrationality, can be predicted and — this is the controversial part — that if the social environment can be changed, people might be nudged into more rational behavior.” (emphasis mine). And if you’re a bit scared by that statement it’s because you should be. I am moved to who’s definition of “more rational behavior”? Theirs? That feels very uncomfortable for me on MANY levels.

There is one major problem with “Middle class out” theory, for a person to follow the incentives they must have money. If you don’t have a job, you don’t have money….unless the government gives it to you. Who is it that employs the middle class? If you want jobs you have to form capital, very simple concept. But the nasty double dose of behavioral economics is that if you don’t have a job, the government can create economic activity through handouts. Did you catch the headline recently about ads and promotion of Food stamps? No coincidence, the policy wonks think they can stimulate the economy leading into the election by putting people on Food stamps. There is no altruistic motive in the policy of “serving the poor”. That’s a line they tell people while doing something else.

Behavioral economics is new stuff and never been proved before on a real economic scale….except for the last 4 years as the policy theorists have been running the store called the US economy. If you draw a basic head to head comparison of 1981 to 1984 vs 2009 to 2012 (similar periods of crisis and recovery), I think you have a fair contrast of economic policy effectiveness that lets you draw your own conclusion. But the real question that you must answer is this as we all decide to cast our votes:

  • Do you want to continue an experiment (Behavioral economics) that has so far not delivered improvement?
  • Do you want a track record (Supply side economics) that brought back prosperity to the US in a similar period of economic distress?

That choice won’t come without tradeoffs. We can’t afford to write checks the politicians mouths can’t cash (which is you and me by the way). People need jobs, and we need owners of businesses to want to create jobs. Tune out the pundits and click on the brain.


About Steve Ledford
Christian, husband, father, businessman, engineer, and all around regular guy. I have travelled some uncommon paths in life. Over the course of time I have found that truth is always simple, without exception. My life's purpose is to find it, live it, and speak it.

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