Historically, the GOP has been united in support of “trickle-down economics.” By that, they mean they support reducing taxes on capital in the hope that it will ultimately be invested in new or expanded businesses. The increase in business activity leads to greater demand for labor, which in turn leads to higher wages for workers in addition to higher profits for capitalists. Hence, the popular name for the concept.
While the theory is not absurd, and may even work under some circumstances, it hasn’t worked for many years, for the following reasons:
1. Improvements in transportation and communications have made it possible to move manufacturing activities, and even some service work, away from areas with high cost labor. Globalization effectively means that the supply of workers is no longer limited to your own country, which in turn means that wages in many fields do not respond to what appear at first blush to be domestic labor shortages.
2. Demographic changes have resulted in a decrease in consumption, and an increase in savings.
3. Successful Chinese mercantilism means that globalization hasn’t necessarily resulted in an explosion of high-paying jobs in industries specializing in exports, at least in the US.
4. These three phenomena collectively mean that there is a glut of available investment capital throughout the world, and limited demand in the US. With a hollowed-out middle class, and more elderly people who can’t afford to put too many resources into consumption, why would American businesses invest in new capacity?
5. Investment, instead, has gone into share buybacks and purchases of securities sold to finance the budget deficit. Tax cuts on capital are, therefore, a form of right-wing recycling for the benefit of the wealthy; they don’t create new jobs or increase wages, but they increase the value of assets owned only by the affluent.
6. Tax increases on the wealthy and redistribution programs which are designed to increase consumption among the less affluent can address the existing imbalance and consequently result in increased growth under current conditions. All of the Democratic candidates appear to agree on this point, and they are right. It is about growth as much as fairness.