January 29, 2014 by David K. Sutton

The Supply Side Lie

Post war until roughly the 1970s, increases in income in all quintiles more or less moved together. The bottom quintile increased with the top quintile. Since the 70s, the top two quintiles continued to grow, with the top quintile actually accelerating (although to be fair, it corrected/adjusted during the Great Recession, but only modestly). But since the 1970s, the bottom three quintiles have been pretty much flat.

But forget about quintiles, let’s talk percentiles, or more specifically, the 95th percentile, which shows an even more pronounced departure from the early post war norm. This is a damning chart:

No — capitalists, free marketeers, and wealth-worshiping conservatives — I don’t need to prove a direct correlation between accelerating top incomes and stagnant middle and lower incomes to know that the effects of this inequality gap are not healthy to democracy. But, I’ll fully admit my prescription for this problem (a much more progressive tax system) might not make that much of a difference, although it’s hardly a reason not to try. But the reason it may not make a dent in inequality is due to the idea that accelerating income inequality is a natural state of capitalism:

New York Times — Capitalism vs. Democracy

Capitalism, according to Piketty, confronts both modern and modernizing countries with a dilemma: entrepreneurs become increasingly dominant over those who own only their own labor. In Piketty’s view, while emerging economies can defeat this logic in the near term, in the long run, “when pay setters set their own pay, there’s no limit,” unless “confiscatory tax rates” are imposed.

I’ve often wondered if the post war period of economic expansion was an aberration. And the reason I believe it could be is that people continue to believe we need to remove government from the equation, and only then will we finally have a true free market. But I know that humans with power will never remove themselves from a power equation, so they will always be able to effect change at a policy level for their benefit. Because of that, and so long as people continue to believe in supply side economics, the inequality gap will continue to grow. But the idea posited in the New York Times article above may refute both Left and Right, suggesting instead unique post war circumstances will not be repeated, leading to a return to capitalism’s natural state, massive inequality.

We were sold supply side as a path to shared prosperity, when the reality is, the country had its greatest period of shared prosperity just before mass adoption of supply side policies starting in the 70s. I can’t prove direct correlation, but neither can supply siders prove their policies work.