Six Trillion Arguments Against Trickle-Down

The Pitch: Economic Update for July 18th, 2024

Friends,

Last week, we passed an unfortunate economic milestone. On July 11th, the wealth of America’s 800-or-so billionaires crossed the $6 trillion mark for the first time. “Billionaire wealth has more than doubled, up by more than $3.1 trillion, since the passage of the 2017 Trump-GOP tax law, which was heavily slanted towards the rich,” notes Americans for Tax Fairness.

Those roughly 800 billionaires account for only 0.0002% of the population, and their wealth has increased ninefold since the year 2000.

By contrast, “The collective net worth of the bottom half of American society–accounting for more than 66 million households–has grown nearly five times slower than the wealth of billionaires this century,” AfTF writes. As a result, “The nation’s 800 billionaires alone now hold roughly 3.8% of the entire nation’s wealth, while the roughly 66 million American families in the bottom half control just 2.5%.”

Even though the Trump tax scheme supercharged the transfer of America’s wealth to the billionaire class, it’s important to note that the tax code has already been working in their favor for decades. AfTF writes that trickle-down tax policies like “the nearly half-off tax discount on prominent forms of investment income; the shielding of lifetimes of capital gains from any tax at all (the “stepped-up basis” loophole); and the failure to tax gains in assets that go unsold (“unrealized” gains), despite the very real economic benefits offered by those gains to their wealthy owners” laid the groundwork for Trump’s trickle-down coup de grace.

Take another look at that chart above. That’s trickle-down economics in action — the installation of policies that enrich the already wealthy and empower the already powerful, at the expense of everyone else. To be clear, that wealth that has been leveraged into the hands of around 800 billionaires is the exact same wealth that grew the paychecks of working Americans who created the strongest economy in the history of the world.

Those growing paychecks of American workers used to create good-paying jobs in the economy through increased consumer demand. But for most of the last five decades, the money that used to go to those paychecks has been transferred to the pockets of a group of people small enough to fit on a single Airbus A380–800 passenger jet. Is it any wonder why so many working people are having such a hard time making ends meet?

The Latest Economic News and Updates

Inflation Is Headed in the Right Direction Again

Paul wrote about the strong job report in last week’s issue, but there were several other significant recent economic reports that I wanted to highlight. First, Rachel Siegel wrote last week that “prices climbed 3 percent compared with last year, an improvement from the 3.3 percent annual figure notched in May. Prices also fell 0.1 percent over the previous month.”

“Additionally, a key measure of inflation that strips out more volatile categories such as food and energy rose 3.3 percent over the past 12 months — the smallest annual increase since April 2021,” Siegel writes.

This is a good step forward — in fact, it puts us far ahead of our international peers. The International Monetary Fund now predicts that the United States will end the year with 2.6% GDP growth, far surpassing other leading nations.

All this positive news is another compelling data point to argue that the Federal Reserve should immediately start to bring interest rates down at their next meeting. Those interest rates are the biggest remaining cause of price increases for Americans, making credit cards more expensive and driving up the cost of mortgages for prospective homebuyers. And we’re seeing the number of evictions going up by more than a third over last year in Sunbelt states that have fewer renter protections.

You might have missed it in all the news this week, but President Biden on Tuesday announced a smart policy proposal to help renters: A federal plan to ensure that landlords can’t jack up the rent on their tenants without grave repercussions.

The plan was leaked on Monday to the Washington Post’s Jeff Stein and Rachel Siegel, who reported that the proposed law “calls for stripping a tax benefit from landlords who increase their tenants’ rent more than 5 percent per year.” The policy “would only apply to landlords who own more than 50 units, which represents roughly half of all rental properties,” and it also “wouldn’t cover units that have not yet been built, in an attempt to ensure that the policy does not discourage construction of new rental housing.”

I cannot repeat this enough: High housing costs are one of the biggest pressures facing American voters this year. After this month’s good inflation report and the continued strength of the job market, you could make a great argument that housing prices are the single biggest economic issue of 2024.

The Biden Administration’s policy approach would likely be incredibly effective. It’s not a ban on large rent increases, but rather an incentive for large landlords to keep annual rent hikes to an acceptable level. It disarms trickle-down claims of adding a burden to landlords — if they want to raise rents higher, they can simply forgo the tax benefit and try to make up for that loss with higher rents.

There’s much to do — on the state, local, and federal levels — to bring down housing prices for everyone. But this policy should appeal to the more than one-third of all voters who rent their homes. Since the pandemic began, American renters have been living in fear of letters from landlords announcing giant rent increases, and they have had few signs that anyone in power has been fighting for them. This proposal is a good first step toward addressing the lingering problem of skyrocketing housing costs.

The Lower Your Wages, the More You Pay

Retail sales were flat in the month of June, but as Axios’s Courtenay Brown reports, if you look below the topline numbers you’ll see some encouraging signs for American consumers. Spending on cars plummeted in June, which was in large part due to back-to-back cyberattacks on 15,000 auto dealers nationwide, and sales dropped 3% at gas stations last month due to dropping energy prices.

Remove those two large drops in very specific categories, and you’ll find that “Retail sales increased in nearly all of the other categories tracked by the government,” Brown explains. “Retail sales at online retailers jumped nearly 2%. At homebuilding supply stores, sales rose 1.4%. Retail sales rose almost 1% at health and personal care stores.”

So the flatlining sales numbers we saw in May largely didn’t continue into June. It seems that American consumers are still spending money. And big corporations are finally starting to dial back the greedflation that drove prices up last year. Julie Creswell and Danielle Kaye write for the New York Times:

“On Thursday, the food and beverage giant PepsiCo reported a 0.5 percent decline in revenues in the second quarter in its Frito-Lay snack business from year-ago levels, a result of a 4 percent drop in volumes in the category.” Customers were simply not willing to pay $6 for a bag of Ruffles, the Times explains, and that was finally hurting PepsiCo’s bottom line.

“To get more people to grab bags off the shelves, PepsiCo said it intended to cut prices or offer more sales on certain salty snacks and other products,” the Times reports, quoting PepsiCo CEO Ramon Laguarta as admitting on an earnings call, “There is some value to be given back to consumers after three or four years of a lot of inflation.”

That’s certainly one way to put it. A much clearer way to phrase it might be, “we took advantage of headlines warning of inflation to raise prices much higher than costs in order to inflate our profit margins, and customers are mad at us, so we’re going to have to bring prices back down.”

But prices are still much higher than they were before the pandemic began, and even though wages climbed higher than inflation over the last year, people on the lower end of the wage scale are reporting near-record-high difficulty making ends meet. Axios reports that a University of Michigan study found that “Lower-income consumers tend to spend a larger share of their earnings on rent, food and gasoline — all categories that have been key sources of inflation in recent years,” and “Pandemic-era savings have run down; the cost of their debt is getting more expensive.”

All this is probably why nearly half of the 40 million or so Americans who still owe student loans have not started repaying their loans since the three-year repayment timeout ended last fall. “Seven million borrowers with federally managed loans were at least 30 days overdue on their payments at the end of 2023,” writes Stacy Cowley. “That’s the highest delinquency rate since 2016, as far back as the department’s public records go.”

The super-rich folks at the top of the income scale and the upper middle class are still doing well, but despite the historic gains in income and wealth we’ve seen in the past few years, Americans at the bottom of the wage scale continue to face real struggles from the hangover of the last 40 years of trickle-down economics.

Fed Up with High Costs

So as we’ve seen, the job market remains mostly strong and wages continue to grow, but there are real reasons for economic distress. Housing prices are high, credit is expensive, and job creation is starting to show signs of leveling off.

What can be done to solve these problems? I’ve already mentioned one solution to this problem that is practically a no-brainer: The Federal Reserve should immediately begin lowering interest rates. The Fed raised interest rates to slow the economy down in an effort to bring prices down. Prices have leveled out and are dropping in several promising areas — though it’s pretty clear that interest rates had little to do with that, but that’s an argument for another time — and now interest rates are making mortgages and credit much more expensive for working Americans.

But Employ America also issued a compelling case for the Fed to lower interest rates in order to improve the job market. “Just as nearly every Fed official has said they should not and will not wait until inflation is at 2% to cut, they should also not wait until the labor market is in perfect balance between supply and demand,” they write. “As the labor market softens, the appropriate policy response is to begin lifting restriction, not holding the federal funds rate at this level even while inflation has fallen so much.”

“The case for cutting [interest rates] soon is simple: unemployment has risen and inflation has fallen; policy should adjust accordingly,” Employ America concludes. “At this point, the question is no longer ‘What’s the rush’, but ‘Why are we still here?’” That’s the question every member of the Fed should ask themselves before they next meet to decide what to do about interest rates.

This Week in Middle Out

• As Paul noted last week, the Biden Administration extended overtime protections for 1 million more American workers this month, which especially benefits women and Black and Latino workers.
• And OSHA also established a new regulation to protect workers from the excessive heat conditions caused by climate change.
• “Two senior members of Congress have asked the acting secretary of labor, Julie Su, for information and data on child labor violations and protections in federally subsidized youth work programs amid a rise in reports of labor abuses against minors,” the Guardian reports.
• The FTC is investigating pharmaceutical manufacturer Teva under suspicion that the company is guilty of “junk patent listings,” which drive up the prices of medications including asthma inhalers.
• “The Biden administration’s yearlong effort to crack down on delinquent rich taxpayers has yielded $1 billion, a milestone that the Treasury Department said on Thursday was the result of beefed-up enforcement by the Internal Revenue Service,” reports Alan Rappeport at the New York Times.
• Housing advocates are working to overturn a ban on rent control in California.
• Coral Davenport writes in the New York Times, “The Biden administration has reached a settlement with General Motors after determining that the automaker sold nearly six million cars that emitted more planet-warming carbon dioxide than the company had claimed, violating federal regulations.” GM will now pay $145.8 million for violating the EPA’s regulations.
• Here’s a policy that makes great sense: Some cities have begun pairing the renovation and construction of new library branches with the construction of affordable housing. In cities like New York that have very little available space for the city to build affordable housing on, libraries present a natural solution. And who wouldn’t want to live within close proximity of a library?

This Week in Pitchfork Economics

• It’s not every week that a Nobel Prize winner drops by for a chat, so Nick and Goldy make the most of Joseph Stiglitz’s Pitchfork Economics appearance this week. Stiglitz talks about his latest book, The Road to Freedom, and he lays out an economic philosophy that he calls “progressive economics.” Readers who are familiar with the idea of middle-out economics will likely recognize quite a few similarities between Stiglitz’s vision and what we talk about every week here in The Pitch.
• And also, I wanted to make sure that you saw a video on our new Pitchfork Economics YouTube channel that discusses how private equity looted Red Lobster, and what that says about the rest of the economy:

Closing Thoughts

“America’s so-called ‘left behind’ counties — the once-great manufacturing centers and other distressed places that struggled mightily at the start of this century — have staged a remarkable comeback,” writes Jim Tankersly for the New York Times. “In the last three years, they added jobs and new businesses at their fastest pace since Bill Clinton was president.”

This is more than just another story about America’s Rust Belt. Tankersly is highlighting a new report from the good folks at the Economic Innovation Group, and their map shows how widespread the “left behind” county problem really is, affecting nearly every single state:

“These counties added jobs and people far more slowly than the nation as a whole,” Tankersly writes. “Some lost factories to foreign competitors like China. Many lost residents, including educated young workers, as economic activity concentrated in big cities like New York and San Francisco.”

Donald Trump ran in 2016 on a promise to fight for the so-called forgotten Americans in those lost counties, but he seemed to forget about them just as soon as he was elected. The EIG report shows that “in terms of job growth, left-behind counties experienced three of their four worst years since the Great Recession on Trump’s watch,” Tankersly writes.

But something remarkable is happening in those forgotten counties. “Left-behind counties added jobs five times faster in the first three years of the Biden administration than they did in the first three years of the Trump administration. The flow of residents leaving them for better opportunities slowed,” Tankersly writes.

“Perhaps most strikingly, they have shared in a new-business boom that has swept the country since the pandemic. That didn’t happen after the Great Recession,” he continues.

The EIG report draws that comparison even more clearly: “These counties lost a similar number of jobs in the Great Recession and the COVID-19 pandemic — 1.9 million and 1.7 million, respectively. But the recovery after COVID-19 has been much swifter. Collectively, left-behind counties have already recouped nearly all the jobs lost in the COVID-19 downturn.

The report doesn’t draw any specific conclusions as to why left-behind counties have been improving, but it seems pretty clear, given the widespread geographic distribution of these counties in red and blue and poor and wealthy states alike, that the Biden Administration’s middle-out economic policies at the federal level must have played a major role in this rebirth. All those trillions of dollars earmarked to infrastructure, semiconductor manufacturing, and green energy have been shown to bring new life to the Rust Belt, and it’s likely that these counties have enjoyed the same economic investments. After 40+ years of trickle-down extraction that favored big corporations, this revitalization is what middle-out economics looks like.

The report acknowledges that these counties largely lean politically to the right, and it’s unclear if they’ll continue to embrace trickle-down austerity at the ballot box after three of their most prosperous years in decades. “How voters in these communities perceive and factor these economic trends into their decisions at the ballot box this fall is a major open question this year,” the report concludes. “But one certainty is that the economic backdrop for the next presidential election cycle will be markedly different from both the original 2020 contest and the 2016 race.”

Be kind. Be brave. Take good care of yourself and your loved ones.

Zach