The true path to prosperity
Wednesday, December 6, 2017
It’s often thought that Democrats care about fairness and not economic growth, while Republicans care about growth even at the cost of some fairness.
Rubbish. Growth and fairness aren’t opposites. In reality, Democrats are the party of economic growth and fairness. Republicans are the party of neither.
The only way to grow the economy is by investing in the education, health care and infrastructure that average Americans need in order to be more productive. Growth doesn’t “trickle down.” It rises up.
Consider the two biggest legislative initiatives over the past decade— the Affordable Care Act, achieved without a single Republican vote, and the current Trump-Republican tax overhaul, speeding ahead without a single Democrat.
The ACA extends coverage to 21 million mostly lower-income Americans, including millions of children.
It’s largely paid for by two tax increases on the rich—a 3.8 percent increase on their capital gains taxes and other investment-related income, and a 0.9 percent surcharge on their Medicare taxes. Those tax increases are a major reason why Republicans have wanted to repeal it.
But the ACA isn’t just about fairness. Healthier Americans are also more productive workers. Children who receive health care are better learners. The Act thereby fuels economic growth and widens prosperity.
Republicans say their tax overhaul will promote growth by increasing the profits of American corporations and investors. This is trickle-down nonsense.
Every major study (including Congress’s own Congressional Budget Office and Joint Committee on Taxation) finds that its benefits would go mainly to big corporations and the wealthy.
Share prices may rise for a time. They’re already at record highs in anticipation of the tax cut. But higher share prices don’t trickle down, either. The richest 1 percent owns almost 38 percent of the stock market. Eighty percent of Americans together own just 8 percent of all shares of stock.
This won’t fuel growth. Corporations expand and invest only when customers are eager to buy what they produce. And most of these customers are middle-income and below, who spend just about all they earn. The rich spend only a small fraction.
Profits are now at record levels, but corporations aren’t investing them. They’re using them instead to pump up share prices and executive pay.
After the Bush tax cuts of 2001 and 2003, economic growth stalled and then dissolved in recession. After the 2004 corporate tax holiday for bringing foreign profits home, corporations didn’t invest or expand. The Reagan tax cut of 1981 didn’t cause wages to rise; they flattened.
What’s the real formula for growth? Better access to education, health care, and transportation, all of which make workers more productive.
These more productive workers command higher wages. With higher wages, they purchase more goods and services. These purchases motivate companies to expand and invest, and create more and better jobs.
American experienced this virtuous cycle for 30 years after World War II. We invested unprecedented sums in education, healthcare, and infrastructure. We financed these investments through higher taxes on the rich and on big corporations.
The economy boomed and wages shot upward. The wages of the bottom fifth rose even faster than the wages of the top fifth. This unleashed consumer spending, which generated more growth.
The Clinton administration tried this formula on a much smaller scale in the 1990s, raising taxes on the top and investing in education and infrastructure. The economy boomed, 23 million new jobs were created, and for the first time since the late 1970s the typical American’s wage rose.
The Trump-Republican tax overhaul would take us in the opposite direction. It raises taxes on the middle class, which would reduce their purchasing power. The Senate version would cut the Affordable Care Act, causing millions to lose coverage.
It also explodes the federal debt, which will stymie growth. Debt service itself would likely require cuts in other programs such as Medicare, Medicaid, education, and transportation.
Senator Orrin Hatch warned last week that the Children’s Health Insurance Program may not be refunded “because we don’t have money anymore.”
The current tax proposal would also eliminate the state and local tax deduction, which would likely cause states to cut back spending, including education and infrastructure.
All of this would slow economic growth.
For years, Republicans have been selling tax cuts by lying that they spur growth, which trickles down to average Americans.
For just as long, Democrats have been selling fairness, but without explaining why a fairer economy is also more productive and prosperous.
It’s time for Democrats to make the case. It has the virtue of being true.
Robert Reich, is the professor of Public Policy at the University of California, Berkeley, and a senior fellow at the Blum Center for Developing Economies. He served as secretary of labor in the Clinton administration.