“The days of trickle-down economics are over”

The Pitch: Economic Update for March 14th, 2024

Friends,

The consensus among journalists, pundits, and the public is that President Joe Biden delivered a lively and powerful State of the Union address last Thursday night. In this case, I happen to agree with popular opinion — the President’s speech was well-written and delivered energetically. He came across as a happy warrior fighting for the American people.

Still, coverage of the State of the Union focused too much on the staging and reading of the speech, and not enough on the substance of what President Biden said — too much aesthetic critique and not enough policy analysis. So it’s worthwhile to take a few minutes to look at the text of the speech and consider it through an economic lens.

“I want to talk about the future of possibilities that we can build together,” President Biden said near the beginning of the speech, calling it “a future where the days of trickle-down economics are over and the wealthy and the biggest corporations no longer get all the tax breaks.”

That’s a continuation of last year’s attack on the trickle-down paradigm that has dominated American economic policy through both Republican and Democratic administrations for the past 40-plus years, and Biden’s argument has gotten sharper and more persuasive over the past year. “I grew up in a home where trickle-down economics didn’t put much on my dad’s kitchen table,” Biden explained, and he immediately offered an alternative to trickle-down economics: “That’s why I’m determined to turn things around so the middle class does well. When they do well, the poor have a way up and the wealthy still do very well. We all do well.”

What does that look like in practice? Biden listed several accomplishments aimed at improving outcomes for the middle class, including capping the price of insulin at $35 a month — previously, some patients were paying up to $400 a month — and fighting to lower prescription drug costs for all Americans. He cited his CHIPS Act semiconductor manufacturing legislation which created “tens of thousands of jobs, many of those jobs paying $100,000 a year and don’t require a college degree,” and his infrastructure package which is funding 46,000 projects around the nation.

And Biden made the case that thanks to his middle-out policies, “our economy is literally the envy of the world,” citing an impressive list of accomplishments:

Fifteen million new jobs [created] in just three years — a record. Unemployment at 50-year lows. A record 16 million Americans are starting small businesses, and each one is a literal act of hope, with historic job growth and small-business growth for Black and Hispanics and Asian Americans. Eight hundred thousand new manufacturing jobs in America and counting…More people have health insurance today than ever before. The racial wealth gap is the smallest it’s been in 20 years. Wages keep going up. Inflation keeps coming down. Inflation has dropped from 9 percent to 3 percent — the lowest in the world and trending lower.

It’s not enough to talk about the past. Biden also discussed several policies that would directly cut costs and grow paychecks for Americans. He urged Congress to pass pending legislation that would “build and renovate 2 million affordable homes.” He vowed to “expand high-quality tutoring and summer learning,” in addition to making other investments in public education and job training. He called on Congress to restore the Child Tax Credit that helped families pull the American economy out of its pandemic-era doldrums and push it to its current strongest-in-the-world status.

And he asked the American people at home: “Does anybody really think the tax code is fair? Do you really think the wealthy and big corporations need another $2 trillion tax break?” Answering his own question, Biden continued, “I sure don’t. I’m going to keep fighting like hell to make it fair. Under my plan, nobody earning less than $400,000 a year will pay an additional penny in federal taxes.”

“The way to make the tax code fair,” Biden explained, “is to make big corporations and the very wealthy begin to pay their share. Remember, in 2020, 55 of the biggest companies in America made $40 billion and paid zero in federal income tax. Zero.” He also proposed a 25% minimum tax for billionaires that would raise half a trillion dollars in revenue over the next decade. Biden then framed his proposal directly in opposition to then-President Trump’s $2 trillion tax cuts for the wealthiest Americans and corporations, marking a clear difference in tax policy for the November elections.

Biden also pointed out that his Administration is cutting junk fees and combating the rampant greedflation that is still inflating prices for the American people. “My administration has proposed rules to make cable, travel, utilities, and online ticket sellers tell you the total price up front so there are no surprises,” he said.

A little further down, I’ll discuss the budget that President Biden proposed immediately following the State of the Union, which lays out some of these policies in greater detail and offers some significant avenues to address the economic problems that still linger in the wake of the pandemic. But I also wanted to highlight the rhetorical flourish with which Biden summed up his understanding of how the economy works, because it was one of the most full-throated and concise explanations of middle-out economics that I’ve ever seen: “I came to office determined to get us through one of the toughest periods in the nation’s history. We have. It doesn’t make the news, but in a thousand cities and towns, the American people are writing the greatest comeback story never told,” Biden said.

“So, let’s tell the story here and now,” he continued. “America’s comeback is building a future of American possibilities — building an economy from the middle out and the bottom up, not the top down, investing in all Americans to make sure everyone has a fair shot and we leave no one behind.”

Biden continued, “the pandemic no longer controls our lives. The vaccines that saved us from COVID are now being used to beat cancer. Turning setback into comeback: that’s what America does,” he said. And the way to make that transformation is to bet big on the capabilities of the American people, ensuring that families have the economic power and freedom to build a better future for themselves — and, through them, for everyone.

The Latest Economic News and Updates

What’s in Biden’s Budget?

As I noted above, a couple days after the State of the Union, President Biden released his proposed 2025 budget, and it offers a fuller view on how the President would put his middle-out economic philosophy into action in a second term. (And yes, the current state of partisan politics ensures that the Republican House would never allow this budget to be voted into law as-is. But budgets are also important because they are moral documents which demonstrate priorities and possibilities — particularly during an election year.)

So what’s in the Biden budget? As he mentioned in the State of the Union, President Biden would revive the Child Tax Credit that would provide $3600 annually to families with children under the age of 6 and $3000 for older children. He would also expand the Earned Income Tax Credit to cover more Americans, cutting the taxes of nearly 20 million Americans by $800 per year.

What else? For CBS News, Aimee Picchi explains the budget would:

Create a new program for families earning less than $200,000 that would guarantee affordable child care from birth until kindergarten. The White House said most families would pay $10 or less a day and that the program would help parents of more than 16 million kids.

Create voluntary, free preschool for all 4-year-old kids.

Provide $10,000 tax credits to first-time homebuyers and current homeowners in so-called “starter homes” that would help offset the cost of buying a home or selling their current property.

Make permanent the expanded premium tax credits for people who buy health insurance through the Affordable Care Act’s marketplaces. The budget would also provide Medicaid-like coverage to people in states that haven’t adopted the Medicaid expansion.

The budget would also establish a national paid-leave program for American workers and shore up Social Security for future generations. These are all popular policies that would put more money in the pockets of the vast majority of Americans, allowing them to spend more money in their communities and create jobs with their consumer demand.

So how would Biden achieve those popular policy goals? By making sure that corporations and the wealthiest Americans pay at least as much as everyone else does in taxes. The first step toward rebalancing the tax code would be to allow the $2 trillion Trump tax cuts to expire, thereby ensuring that rich people pay at least as much in taxes as they did in 2017 — a bargain compared to the much higher tax rates they paid for most of the 20th century, when the American middle class was at its strongest.

I don’t know about you, but I would rather live in an America with federal paid sick leave and affordable childcare policies. And there’s a great argument that the Biden budget would help restore working Americans’ faith in the economy. For the New York Times, Bryce Covert writes an insightful editorial explaining why economic satisfaction levels are so low: “We built a real social safety net in the United States and then abruptly ripped it apart,” she writes.

“In the pandemic, the country created the most robust safety net we had seen in decades, buffering people against eviction, poverty, hunger and other suffering. Americans’ lives were materially and appreciably improved. Then we took it all away,” Covert explains. “The message received is that the government could have done these things all along but had chosen not to — and has chosen once again to withdraw that kind of security.”

Finally, someone is talking about this in a major news outlet! The pandemic changed a lot about our understanding of the economy and government, and by and large both trickle-down politicians and the media simply tried to revert to a pre-pandemic way of thinking. But because Americans finally had a taste of what government could do to improve their day-to-day existence, the lapsing of pandemic-era protections didn’t feel like a return to normal — instead, important benefits were ripped away.

This Biden budget would go a long way toward returning those protections and ensuring that all Americans had the freedom to face uncertainty and come out even stronger on the other end. When the middle class was at its strongest, the idea that you could quit your job, start a business, and take a big risk without winding up completely destitute was a big part of the American dream. It’s time to reinstate those basic economic expectations for all Americans.

Inflation Sticks at 3% for Now

“Data released by the Bureau of Labor Statistics on Tuesday showed prices rose 3.2 percent over last year, slightly outpacing forecasts of 3.1 percent,” writes the Washington Post’s Rachel Siegel. “Prices also rose 0.4 percent in February over the previous month — in line with expectations, but still hotter than economists would like to see.” So what was driving those higher numbers this month? Housing costs rose again, as did airline fares, clothing, and car insurance.

That last one is particularly dramatic: The price of car insurance has risen over 20% last year alone, which the New York Times notes is the largest increase since 1976.

Economists believe that the spiking insurance rates are tied to the fact that car and truck prices soared (by about 20% for new cars) in the earliest days of the supply-chain crisis. Right now, those increases are roughly on par, but the Biden Administration should keep a close eye on the insurance industry for warning signs of greedflation. As we saw in the grocery industry, some CEOs get even greedier when they realize that they can raise the prices and sell to a smaller, wealthier group of consumers in exchange for even higher profits.

And in terms of grocery greedflation, it seems that consumers have finally had enough. Hershey’s, which raised prices and raked in record profits even as it sold to a shrinking market of consumers over the past few years, is now facing a dilemma. Due to bad weather and other supply chain issues, cocoa prices are rising dramatically — but because Hershey’s spent the last three years artificially raising the prices of their candy bars, they’ve already pushed their consumers to the breaking point.

Now that their cost of goods has increased dramatically, Hershey’s is finding that they’re unable to raise the prices of their products any more, and they’re warning Wall Street that profits are unlikely to keep rising. Maybe milking consumers for every last cent in the name of record profit margins wasn’t a sustainable way of doing business?

Before this inflation report, the Federal Reserve was hinting that it might lower interest rates when it meets next week, but now their decision is in doubt. It seems unlikely that one small uptick in the inflation report will inspire the Fed to raise interest rates, but many experts think that this report might inspire the Fed to delay lowering interest rates for another couple of months.

The problem is that the Fed’s higher interest rates are pushing the cost of mortgages — and therefore housing — out of the realm of affordability for many Americans. The Fed claims to be keeping interest rates high to combat inflation. But by lowering interest rates, the Fed would lower the cost of housing, which actually remains one of the biggest drivers of inflation. We’ll have a lot more to say about this next week, after the Fed meets.

American Workers Are Doing Well — but Huge Gaps Persist

“The U.S. economy added 275,000 jobs in February, a sign of continued strength for the jobs market,” writes the Washington Post’s Lauren Kaori Gurley. “The report, which beat expectations, marked the 39th straight month of job gains — in what economists broadly consider an exceptionally strong recovery from the widespread job losses wrought by the coronavirus pandemic.”

The most jobs were created in the health care and restaurant sectors, though warehouse and transportation jobs also saw an increase after a few months of slumps, too. Worker wages increased a remarkable 4.3% over last year, though wage growth did drop off from last month’s highs.

It’s not all great news. Unemployment rose among women workers and Black workers. The financial and technological sectors laid off 84,638 workers last month — a remarkably high number for February, which is a traditionally lax month for layoffs (you have to look back to 2009 to find a higher number of layoffs in a February.) But there are 1.4 job openings for every unemployed American worker, which is still a historically high number.

When you dig deeper into the lived experiences of working people, huge inequalities begin to appear. The New York Times put together a dazzling infographic report on the number of Americans who continue to work from home. Some 80% of the job market is on a fully in-person work schedule, while the remaining 20% — mostly wealthier college-educated workers — either work completely from home or are on a hybrid home-and-office schedule.

And the Economic Policy Institute noted that March 12th, 2024 was Equal Pay Day, also known as the day at which women finally earned as much as their male counterparts did in the year of 2023. That’s right — the average American woman has to work nearly 14-and-a-half months in order to earn what the average American man makes in 12 months.

EPI notes that women were making great progress in closing the gender pay gap until the early 1990s, when the gap basically froze:

You should read all of EPI’s report, which shows that the gender pay gap persists across every single measurable characteristic, but that gap is even greater for some workers — Black and Hispanic women are paid less than white and Asian women, for instance, and the higher-paying the job, the bigger the gap gets between men and women.

But the biggest gaps are still between the one-percenters in the executive suite and everyone else. This Guardian article shows that many corporations pay executive salaries that far outstrip their annual tax bills. Over the five years between 2018 and 2022, for instance, Netflix paid $236 million in taxes, but $675 million in executive pay. In that same timespan, Tesla totaled -$1 million (yes, that’s negative one million dollars) in taxes, but it paid out $2.5 billion in executive pay.

The real work in the fight against income inequality going forward is to shrink those gaps between the haves and the have-nots on every level, ensuring that every worker earns enough to fully participate in the economy.

The Taxing Truth About Taxes

That Guardian piece I mentioned directly above has another eye-popping revelation: Even as corporate profits skyrocketed over the past 40 years, corporate taxes languished below 1970s levels:

And on an individual level, the wealthiest few have made an art form of avoiding taxes. Vox’s Whizy Kim published an excellent guide outlining how billionaires avoid paying taxes, ranging from hiding their wealth in stocks to categorizing all their spending as non-taxable business expenses to offsetting their payments in questionable philanthropic spending to outright illegal acts like offshoring huge portions of their wealth.

As April 15th approaches, we’ll be seeing a lot more about how the wealthy and powerful rig their taxes, and what we can do to unrig the system to ensure that the richest pay at least the same tax rate as the people who work for them.

This Week in Middle Out

• Thanks to increased scrutiny from the Biden Administration, JetBlue announced that it would cancel its attempted bid to merge with Spirit Airlines, which would have created the 5th largest airline in the United States, thereby raising ticket prices and decreasing competition for consumers.
• The Center for American Progress checks in on California’s steps toward making housing more affordable. The state has for decades required municipalities to plan adequate housing measures to meet the needs of expected population growth, but new state laws making it easier to build denser housing options could mark a big step toward housing affordability everywhere in the state. Meanwhile, New York lawmakers are reviving the 1950s-era idea of a public benefit corporation that would fund the construction of housing on public land.
• For the first time in decades, Peter Coy writes, manufacturing is rebounding in the United States, but recent middle-out policies adopted by the Biden Administration will take a long time to manifest in the form of new factories and job creation.
• David Dayen says that President Biden’s proposed budget indicates that he wants to keep up the strong antitrust fight against corporate mergers and monopolies.

This Week on the Pitchfork Economics Podcast

A little over a decade ago, the Democracy Journal published a special issue of the policy-minded magazine titled “The Middle-Out Moment.” In that issue, many different authors published pieces explaining a new understanding of economics that refuted the trickle-down paradigm that had increased inequality and extracted trillions of dollars of wealth from the American middle class. Now that President Biden is talking openly about growing the economy from the middle out, Democracy is publishing another special issue — this one titled “The Middle-Out Moment Is Here” — exploring how middle-out has come so far and how far it has to go in order to upend trickle-down economics. The podcast this week features contributors to this issue of Democracy — including Felicia Wong, Bharat Ramamurti, Tara McGuinness, and former White House economic adviser Heidi Shierholz — talking about their pieces and what middle-out means to them. We’ll have a lot more to say about this issue of Democracy next week.

Closing Thoughts

We spent a lot of time this week talking about the Biden Administration’s past middle-out accomplishments and what policies it might adopt in a potential second term. So I thought I’d use this space to highlight three policies that the Biden Administration is pursuing right now to invest in the middle class by cutting everyday costs.

First, the Biden Administration announced that it was capping credit card late fees at $8. “In issuing the restrictions, the Consumer Financial Protection Bureau said the government intends to close a legal loophole that had allowed some financial giants to charge an average of $32 per month for a missed or late payment,” writes Tony Romm at the Washington Post. “The amount has proved onerous for some cash-starved cardholders, while enriching the credit card industry, which reaped more than $14 billion in revenue from late fees in 2022, according to the CFPB.”

That late fee cap was the opening salvo for a new presidential “strike force” composed of agents from the Department of Justice and Federal Trade Commission, with the express intent of eliminating junk fees and fighting greedflation. “The council will also discuss a rule being considered by the Federal Communications Commission that would block apartment-building landlords from forcing tenants to purchase particular cable, internet or satellite services, as well as a rule from the Department of Agriculture to block purchasers of meat and poultry products from imposing deceptive contracts on farmers,” writes Chris Matthews at MarketWatch.

And the Department of Health and Human Services announced a new rule to reduce child care costs for more than 100,000 American families, making it easier for “households below 150 percent of the poverty level, families that have a child with a disability, and other vulnerable families” to access quality affordable child care. The policy also streamlines the payment process for child care providers and makes it easier for families to access child care.

These are policies that don’t land on the front page of newspapers, but they’ll make a tremendous difference for the wallets of working Americans. On a day-to-day basis, this is what the work of governance looks like — shifting policies in order to get the outcomes you want by directing economic forces toward the places where they will do the most good. And for the first time in decades, those economic forces are aimed at the true source of prosperity — working Americans.

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

Zach