From: "jim blair" Cc: BCc: Subject: TRICKLE DOWN ECONOMICS II: This is Part II of a two part set. Part I is on the homepage next to this. This section originally was a discussion of the pitfalls of uncritical acceptance of the "facts" created by studies based on statistics, combined with an analysis of the economic aspects of the Reagan Era. But since posting TDEII, I assembled The Sculpting of Statistics which is now on my web page, and established a link to the Reagan Home page. Thus I suggest you read the USE of STATISTICS article, then continue with this (which will include some things to look for on the Reagan Page.) The Reagan Era is generally accepted by both pro and con as an example of TRICKLE DOWN ECONOMICS (TDE), the meaning of which was discussed in Part I. I refer to the years from 1981 (Reagan takes office) to 1990, when the famous "budget deal" raised the top income bracket above the 30% and signaled the real beginning of the Bush-Clinton period. How is a decade of history measured? Compared to what? I'll start with a broad overview. The most obvious event of that time (so important that it has been completely omitted by both sides from all the discussion I have seen so far including the REAGAN Home Page (http//www.erinet.com/bkottman/reagan.html) has been the fall of the USSR. This is probably the most significant event in centuries and will be viewed by future historians as comparable to the triumph of Rome over Carthage. It is seen by his detractors as a lucky accident that happened to us while Reagan was asleep, or as being due entirely to Gorbachev. While there is no way to know for certain how history would come out if we could do it again with other decisions being made, Reagan did implement a plan designed to bring down the USSR. And it did have some adverse effects on the US economy. For information on this topic see "Who Broke the Evil Empire?" National Review, May 30, 1994. I have been told that a section on this may be added to the Reagan Page soon. The adverse effects were the deficit increase- that part due to the military buildup that the Soviets tried to match, and the lower oil prices engineered through Saudi Arabia which undercut the major Soviet export and cut off their source of hard currency. It also damaged the oil based economy of Texas and the US southwest. Well, by comparison, FDR ran up a far larger deficit to win WW II. And it is expected that some will suffer if we are fighting a war, even a "cold" one. And before returning to the main topic, I should be open about my own bias. If I were to die tomorrow and be told by St. Peter: "our computer is down. You will have a wait before we can process your application. There is no bar, so you can re-live any decade of your choice while we reboot. Which decade do you choose?" I would pick the 1970's. For me this was the best, but it has to with events in my life that are personal rather than financial: from an economic/financial perspective the 1980's were best. You should ask yourself the same question. (remember the 1990' are still in progress, so you get only 4 years if you pick them) And yes, I would certainly miss compact discs and computers! WHAT KIND OF STATISTICS? Now about STATISTICS. patrick@marl.research.panasonic.com (PD) referred to a "mountain of statistics" used to prove a point and the analogy is good. Just as a mountain can be shaped into various forms, so the same mountain of data can be used to "prove" (imply is a better word) very different "facts". There are two approaches to the use of statistics: you can either use them to discover what the truth really is, or use them to "prove" a point which may or may not be true. I first became aware of this in the 1960's while a student. Mexico had a rapidly expanding population such that each year the average age in Mexico decreased. This was reported in the press as "the average Mexican got 2 (or 4 or whatever) months younger last year." Which was a perfectly true statement. Of course we all know that everyone in Mexico gets one year older every year; it is only the "average" (mean, also median) Mexican who got younger. If we didn't know this however, I can imagine all sorts of explanations being offered as to why "Mexicans get younger", each promoting a different view of what is important in life. A rest at mid-day renews the body. Corn meal and beans provide complementary amino acids, etc. Logical sounding explanations of a misunderstood fact. Clearly the mean value does not imply anything about any individual in a set that is open, ie there is flow in and/or out. For an example of how "BAD" the Reagan Era was, see Kevin Phillips "The Politics of Rich and Poor"(p17) showing that 80% of the population experienced a DECREASE in income from 1977 to 1988. The table lists Average Family Income by Decile for those two years, with losses in the bottom 8 and gains in only the top 2. Similar data for the Reagan years are available from the Reagan Page (but using different YEARS) and they show positive gains in each decile, which should then mean that EVERYONE gained income during the Reagan Era. And similar data taken during the Carter years (1977-80) shows that the top 1% of the families had ALL of the income growth. Of course any of these conclusions is of the "Mexicans get younger" type. If Kevin Phillips had wanted to make Reagan look even worse, he could have used Average Wage data which has been going down since 1973 (even during the Reagan years), ie. he wouldn't have had to use the Carter Administration to try to make Reagan look bad. Why your AVERAGE goes down as your FAMILY makes MORE. This is mostly because more people (typically wives) now work, a trend which accelerated during the 80's. Husband makes $30,000/year, wife gets job that pays $20,000. Can say GOOD, family income is UP to $50,000/year; or can say BAD, the average wage for a family worker DROPPED to $25,000/ year. And if Junior gets a part time job after school, the average drops dramatically, while family income rises slightly. And ALL these income numbers are "corrected" for inflation using the CPI. But CPI is known to "overcorrect". Incomes went up during this time: the question is, did they go up faster than inflation? That is, did the purchasing power rise or fall? This is not an easy question to answer: see the last part of the item "Inflation & Federal Reserve Policy" in the economics section of my web page. And anyway, all of this deals with AVERAGES and does not apply to anyone in particular. The AVERAGE wage in the US is also strongly affected by the large influx of immigrants that started after a change in the immigration laws in 1965. From the mid-1920's until then, there were relatively few immigrants, and most were educated and skilled. Now about 1/3 of new workers and perhaps half of total population growth is due to immigration. And immigrants today are less educated and have lower job skills (on average) than the native population--see the items under "immigration" in the political section of the web page. Immigration clearly benefits the immigrants or they would not come (or would not stay). But the effect on the native population depends on many factors. In the past it was almost certainly good. But as the total population gets larger and the immigrants are poorer and less educated, things change. And the effect is not the same for everyone. As Mrs Huffington says in the Firing Line debate, the rich benefit from immigration but not the poor who must compete with them for jobs. To Find the TRUTH, Follow the People Is there any way to get at the true picture? PD had a suggestion: personal experience. But you are only one out of 250 million (of course you are the most important one :-). But what if you selected a statistically significant number of people at random and traced what happened to each of them during the time in question? A Treasury study done at the request of the Joint Economic Committee of Congress traced the income reported by 14,351 taxpayers between 1979 and 1988. The results of this kind of study are, I think, more meaningful than most other kind of data. One result is that 85.8% of those who started in the bottom quintile in 1979 had climbed to a higher quintile by 1988. In fact more of them were in the TOP quintile in 1988 than were still in the BOTTOM quintile. For a summary of this data, see the Reagan Home page (link on web page) under INCOME/Income Mobility. Much of the often criticized transfer of wealth from the POOR to the RICH during the Reagan era was poor people getting rich. Most of those in the study who moved down were old people who retired. Surprised? Or is this consistent with the common sense experience that youngsters just out of school start at lower pay jobs, but often work up to better ones. And most people lose income when they retire. (But their total assets are at their lifetime maximum.) This sort of study is like tracing individual Mexicans. While the "average" one is getting younger, a well done study would find that each subject got older. Given the uncertainty of data, they might find that the randomly selected Mexican aged 11.5 months last year. If so many people improved their income during this time, why were there still low income people in 1988? Many new people came into the system, and mostly they came in at the lower end: youngsters leaving home and many new immigrants, largely unskilled from poor countries. If the goal is to make the income distribution statistics look good, we should not let poor people into the country (The Scandinavian Strategy). And if we wanted the figures to look really great, we would deport anyone who was in the bottom 10%. three years in a row! ,,,,,,, ____________________ooo__(_O O_)__ooo_________________________ (_) DOES TRADE CHANGE THE WORLD? A reply to TDE I from Ken (melhaven@rcinet.com) expressed a concern that I have heard before: All my examples of TDE are from the PAST. But foreign trade and the Global Economy are now relatively more important than in the past. Will that change things? Well, let him say it: : 1. Prior to 1980, the U.S. imported very little in regards to her = total economy. In many countries these imports would be considered = large, but not for the U.S. economy. An American automobile content was = basically 100 %, American made, except for raw materials, i.e, rubber, = etc. TVs, appliances and most other hard goods were basically made in = the U.S.A. Under this environment trickle down economics would work, = because most of the purchases by the rich would be American made. = Please note "most." The money spent by the rich would eventually reach = the working person making the product or providing the service. This is = a closed economy. : :2. In todays environment where a large percent of the U.S. economy = consist of imported goods. The affluent would still spend their money = for goods and services, but much of it would end up to pay wages of = foreign labor that made these goods. There are few products sold in the = U.S. today that are American made or contain all American made parts. = In this economy money spent by the affluent is no long distributed among = American workers, but are now shared by workers in foreign countries. = Many Americans that use to have jobs in these sectors are no longer = employed. This a global economy. : :3. American workers working in a factory made $17.00 - $26.00 an hour. = My brother in-law made over $19.00 an hour as a plant production = machinist and maintenance worker. He had steel workers working on the = production line for about $17.00 an hour making aluminum cans for beer = and soft drinks. The plant shut down in Aug 95. The plant equipment = was sent lock, stock and barrel to Brazil. He is still unemployed. He = has a lot of job offers at $11.00 an hour, but not at his old pay. = Because of migration of jobs overseas, and technology, the pay of the = American worker has remained relatively flat for the last 20 years. The = affluent in the meantime have increased their income by over 25% per = year. : :4. Trickle down economics hasn't worked. My assumption is because, we = are becoming more of a global economy, with workers in the U.S. = competing with workers in Mexico, Brazil, Malaysia, etc. This = situation is not unique to the U.S. worker alone. It is happening to = workers in Germany, Britain, France, even Japan. : :5. The U.S. has the largest market in the world. Every nation under = the sun want a piece of the U.S. market. It was this way because of our = high rate of income, relative to the world. Now with jobs in the $17 - = $28.00 an hour being replaced by jobs in the $6 - $9.00 an hour, the = market for these goods and services is shrinking. For the sake of short = term profit, big business had reduced the number of customers available = for their products. A typical example is the automobile. The average = age of cars 10 years ago was 3 years, it is now 5-7 years. Besides many = people no longer buy their cars, they lease them. They just can't = afford these new cars anymore. If they could, these cars would be = financed for 5 years, not the 3 years they did 10 years ago. : :I hope I answered your questions, : : Regards, Ken melhaven@rcinet.com Hi Ken, Now I think that I understand your point. And while I oppose the POLICY implications that most would draw from it, it does have some validity. Actually, I said something along the same line in the "are things getting Better :-)" part of my web page: the developing "global economy" is narrowing the gap between rich and poor. WORLD WIDE. (that's good, isn't it?) But at the same time it is widening the rich/poor gap in the US, as our "poor" and even "middle" (all RICH by international standards) get competition from the poor of the 3rd world (the Really poor). I think this is both inevitable and, on balance, a GOOD THING. The basic unit here is the earth and the human race, not any one country. And I think your figures are off a but. Considering total compensation, it is closer to say $40 per hour jobs are being replaced by $15 per hour ones in the US, or $5 ones abroad. There was a time, after WWII, when (some) unskilled or semi-skilled labor in the US could get a high salary and "we" could be rich while most of the human race lived at the edge of starvation. But those days are over EVEN IF WE (Buchanan) try to bring them back. The Genie is out of the bottle, and we can't put it back. As you say, it is not just the US but the industrialized world that is being effected. I think this point comes up in Peddling Prosperity (and my review of it). There is the practical problem that if WE are rich and THEY are poor, THEY just move HERE. That is what is happening now. The US or the WORLD? You say that Trickle down "hasn't worked". But of course whether or not an economy "works" depends on what is considered to be success. By comparison to the rest of history and to most of the world today, the US economy is a success. I claim that "supply side economics" HAS worked in the US: in the 1920's and the 60's and the 80's. And from 1800 to WWI. Low (or lower) tax RATES have resulted in economic growth and increased tax REVENUES; while higher RATES (in the 1930's, 70's and 90's) have either REDUCED revenue or lowered the growth of revenue. This was the claim of Arthur Laffer, and the supply side economists. The figures are clear about this, but I keep reading about how the 1980's prove that Reagan was a fool who destroyed America and caused us to be poor today, etc. Read the "Baseball Players Syndrome". And see the Reagan Page under DEFICIT & DEBT/Facts. Is it Wealth Trickling DOWN or People Moving UP? And while I used the term TRICKLE DOWN, I see the idea of a 30% limit on the top tax rate as stimulating economic growth by PROVIDING INCENTIVE for people in the middle and bottom of the income curve to work/invest/invent to try to BECOME rich: not that wealth will trickle down from the "already RICH" to the middle and poor if the government lets the already rich keep the money. You seem to have this second view, and think that the money will now (with world trade) trickle down to the rest of the world rather than to people in the US, as in the past. As if there was only a fixed amount of wealth. When a poor or middle income person makes a lot of money, they BECOME "the rich". And it should be clear that investment abroad causes foreign workers to be more productive than in the past. So the net wealth of the world is increased. I think this answers the other often heard question: If world trade will integrate the entire world economy into a unit, will the result be to raise up the poor workers to the level of the rich or drag the rich down to the level of the poor? And if he rest of the world gains in wealth, will that make us less wealthy? Well, by comparison, yes. And from an ecological perspective we may suffer if the rest of the world reaches our "standard of living". You say that cars used to be replaced every 3 years, but now they last 5-7 years. But isn't that GOOD? Is the idea here to have everyone get a new one EVERY year? (mine have always lasted at least 10). Should goods be designed to wear or to wear out? ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth.