Trickle-down economics has been going upward, benefiting the wealthy with tax cuts and driving down wages for workers, thus failing as an experiment in the western world that had lasted most of the 20th century. The Reagan Administration began in January 1981 with the intention of activating the economy with the supply-side policy of tax cuts and cutting state benefits, while expanding military spending to reduce inflation, which was about 10 percent then. The economy recovered, with growth expanding and unemployment declining, along with lower interest rates and lower inflation. A $749 billion tax cut was passed by Congress and sent to President Reagan, because a club comprised of economists and politicians had created a program that was approved by the majority of the public. The economy experienced rising growth, combined with declining unemployment and lower inflation, along with interest rates at record lows, despite returning to a balanced budget, and this would come to be called voodoo economics by critics. It ended 20 years of deficit spending, and led to a decline in living standards and stagnant wage growth for most of the population.
Reagan was at the height of his popularity at that time, and was enthusiastic about the program, only to be disappointed later, when Wall Street got hold of the news. The stock market then crashed by 20% in two months, and the economy went into recession. Although original supply-siders still claim the program failed because it wasn't planned by Reagan's administration, that was a lie.
Supply-side economics is a macroeconomic theory that gained influence in the late 1970s as a trade-off between rising inflation and growing unemployment. The Keynesian Economic census had been broken, with a reduction in inflation that led to higher unemployment. The Keynesian economic establishment had no solution to the problem—the only suggestion it had was an income policy, which meant wage and price control.
Supply-side was associated with the Republicans when it became Reagan’s policy, but both Republicans and Democrats were worried about stagflation. Along with the Soviets, budget deficits were a big threat for the Republicans. In 1980, Reagan proclaimed that higher taxes were hurting the economy, yet wanted to increase revenue for his projects. What became known as Reaganomics meant cutting back government spending and reducing tax rates, winding back regulation, and reducing inflation by controlling the money supply. Supply-side economics works, in theory, by giving tax cuts to high-income earners, so they can invest in business or their home, and create economic benefits by employing people.
Supply-side economics has three pillars: tax policy, regulatory policy, and monetary policy. We'll start with fiscal policy. Supply-siders claim that lower marginal tax rates will motivate workers to work longer hours instead of shorter ones, rather than having more time for respite. Meanwhile, having lower capital gains tax rates lures investors, who can invest capital and increase productively at certain rates. Even a supply-sider would argue that government wouldn't lose any revenue at lower rates with a higher tax base. On regulatory policy, supply-siders are in agreement with traditional conservatives, who favor a smaller government, and markets rigged by a state monetary policy, controlled by the Federal Reserve printing more dollars to put into circulation in the economy, increasing or decreasing the amount of money consumers have to spend, by generating liquidity.
A Keynesian believes that the printing press can solve most problems in the economy, but a supply-sider is likely to think the Fed will only cause trouble by creating too much inflationary liquidity and having a tight monetary policy, so a supply-sider is concerned about the Fed suppressing growth. Supply-side theorists regard monetary policy as changeable and controllable. Supply-siders have influence and have called for inflation to be linked to economic growth in the money supply. Supply-siders advocate reverting to the gold standard, which is odd, because most economists would think this is suspect, because gold has value. Supply-siders insist that the dollar being pegged to gold would make the currency more stable.
In the 1970s, there was stagflation in the economy, which led to higher oil prices, rising inflation, and recession. At the same time, unemployment rose to double digits, while oil reached $104.06—coupled with slow economic growth, this made goods expensive to buy, while there was a plan to moderate unemployment and increase inflation. The central bank had to print more money to keep up demand and prices, without being worried about inflation. A monetary organization such as the central bank has control over money and credit in modern economies, because it has monetary authority over the administration of production and distribution. The central bank of the United States is known as the Federal Reserve System.
Thomas Jefferson was against central banking early on in America. There were state-chartered banks, and a free-banking period around 1837 to 1863. The National Banking Act of 1863 formed national banks with a single currency, based in New York. There had been bank panics in 1873, 1884, 1893, and 1907. America established the Federal Reserve System as a reaction to the bank panics. The Federal Reserve operates by balancing supply and demand in the economy, using tools that offset short-term interest rates, foreign exchange rates, and long-term interest rates, and money or credit—primarily a range of economic incentives including employment, prices of goods and services, along with output. Because the Fed can lend money to private banks in the form of short-term loans and lower bank rates, it can stimulate the economy by lowering the cost of funds for borrowers, with higher bank rates to stop inflation from increasing. A bank rate is the board of governors of the Federal Reserve who decide and set a discount rate. It is compulsory for banks to buy and sell Treasury Bonds, although the Federal Reserve has tools to stimulate or rein in the economy. A bank is a financial institution. It can be commercial or an investment bank, such as Morgan Stanley and Goldman Sachs.
President Reagan wanted to promote economic growth by cutting taxes by 30%, which was known as supply-side or trickle-down economics, and the theory was that high-income taxpayers would buy more stuff and invest in housing. Reagan believed that lower tax rates would bring in more revenue. By increasing taxes, he was practicing the economic theories of Arthur Laffer, who give a review of a graph known as a Laffer Curve. Reagan wanted to counterbalance defense spending by reducing government programs. Despite that never happening under his administration, there were budget deficits. He passed the Economic Recovery Tax Act of 1981, and gave a tax cut to every individual. This became known as supply-side economics. Congress then decided to pass the Tax Reform Act of 1986, which reduced the highest tax rate from 50% to 28%, and cut the corporate tax rate.
In 1993, the Clinton administration revoked some of Reagan’s tax cuts. Clinton increased taxes to lower the size of the budget deficit, and created a budget surplus of $1.35 billion in 2000. Clinton offered a tax benefit for families—a child tax credit, which which could be refunded. In 1997, President Clinton signed the Taxpayer Relief Act, one of the biggest tax cuts in US history, which also provided financial assistance for education and retirement. George W Bush won the presidency in 2001, and gave a $1.35 trillion tax cut, which passed Congress and was put into law. Although it was tax relief for families, who got rebates of $300 to $600, and the Bush administration created more discounts, by putting in a Jobs and Growth Tax Relief Reconciliation Act, Bush could not kept all of his promises, and many were not accomplished.
The fact that Donald Trump has won the presidency of United States means that the rich will get richer, while the poor will have their benefits cut—this will become known as Trumped-up, trickle-down economics. Mr Trump is unclear on a lot of policies, although his campaign promised to lower the tax rate for people earning more money, and abolish the estate tax, by lowering the business tax rate. Trump has said on his website that he would collapse seven tax brackets into three, and lower the tax brackets to 12% or 25%, but despite the Republican control of the House of Representatives, along with the Senate, he couldn't get everything passed, because the Republicans do not have a supermajority to repeal the Affordable Care Act. Trump's tax plan will give significant tax cuts to the richest 1% of Americans, according to the Tax Policy Center, depending on the size of the gross domestic product.
Supply-side economics has not worked in any country. It has gone backwards, by increasing budget deficits and bringing in austerity to cut costs for the taxpayer, which meant people have started using credit, with the economy slowing down and not growing, and it always repeats itself.
Supply side economics has been tried in the West and failed trickling down to everyone else and only gone upwards.
Sources
By The United States Congress (The United States Government Publishing Office) [Public domain or Public domain], via Wikimedia Commons