Recently I stumbled across this opinion piece in the Wall Street Journal. It is written by Robert Rieich, a professor of public policy at the University of California at Berkeley, and a former U.S. Secretary of Labor under President Clinton. In it he defines "Obamanomics" and compares them to the conservative coveted "Reaganomics". One point I found particularly interesting because it relates to our recent lectures in class; Top Down vs. Bottom Up economic policy.
Top Down Policy: During the Reagan administration, it was widley believed that lowering taxes on the top earners would incourage them to invest more into capital in hopes of attaining a higher return. The theory here is by allowing them to be rewarded more, they would in turn create more opportunities for everyone from the "Top Down" and the economy would benefit. This is the idea that growth is enhanced when people are allowed to retain their wealth and be rewarded for investing it, or Alpha form our model.
Bottom Up Policy: Obama's Administration believes that the economy grows better form the other direction. By increasing taxes on the top 2%, Mr. Obama plans to better fund U.S. infrustructure, create more pell grants for low income students, and improve health care and education. In doing so, he hopes to create a better educated more efficient workforce which will help the economy to grow.
Personally I would like to see the Model that Team Obama is using. Each of their goals is admirable and on a social scale would improve the lives of many. However if by accomplishing these goals they hamper the growth of the economy the effects would surely be short lived. It seems to me they are missing a key point from Adam Smith's Wealth of Nations. Most people don't set out to become better educated to improve the lives of others, but rather to improve their own life. Unfortunate as this may be, it is a fact of life. Removing the incentive to earn more, by raising taxes, is not going to result in a better workforce.


Victoria said...

I think the Top down policy is good one. The top earners know how to manage and make more money well, so they would create more opportunities for everyone.

Anonymous said...

It is not necessarily demonstrated that the top earners know how to manage and...would create more opportunities for everyone.
Yes, they obviously know how to make more money but there isn't evidence to suggest that the "trickle down" theory of economic growth is valid. In fact, this justification of Reagonomics was merely implied for the most part.
According to Buffett, amoung others, the slight increase in marginal tax rate (remember, it's a tax increase only on the amount >$250k) does not significantly decrease incentive to earn more (except in looney "going galt" people that haven't actually gone galt, so they can be discounted.)

The Reaganomics model is based on the promise that one day, the (guessing) 90% of people making <$250k may one day be that successful and, thus, should want there to be a lower tax rate. The problem is that the lower tax rate on the higher incomes does not actually increase the number of people in that bracket. Just look at the last 10 years of income growth in the lower brackets. All that has happened is the disparity increased. Anecdotally, yes, some people have done better and moved up the income ladder but overall that is not the case.

Alexander said...

I don't think it is fair to say that all top earners know how to manage better or make money better. The amount of people in the high tax bracket that will see an increase isn't enough that you could really argue that the workforce on a whole would become less motivated.

Trevor said...

There are many upper-level managers who are well educated, understand the economy and have the skills to facilitate growth in a company, but not all are in that position. Many, who are not qualified to lead a corporation, received the position they hold because of politics within the organization or the industry. Companies that have solid senior management can create new opportunities and growth, not only for the company, but for the employees within the company as well as many others not affiliated with the company because of the ability these companies have on the growth of all other areas in society.

Calvin said...

I would have to agree that Obama's idea of the bottom-up policy is a good idea but I believe that it will result in little improvement. People who are motivated enough to go to college will do it either way and the incentives to go to school, incentives like pell grants or tax breaks, aren't appealing enough to get people into school. There will be very very few who when they were to hear of Obama's plan would suddenly jump up and decide to change their lives and their attitudes and actually get a full education. And most, if they ever did start, would probably never finish. A stimulus for the economy needs to happen among everyone possible and not just the lucky students getting extra money who were always planning on being there to begin with.

Anonymous said...

You are focusing on one specific part of the differences. The comparison is between top vs. bottom approach.
Reagonomics, in essence, is the belief that given the "top" greater incentives will encourage them to invest and grow the economy.
Obamanomics is the belief that if the government invests from the "bottom", it will increase productivity and grow the economy.

The issue with Reagonomics now is that given the incentives to the top does not necessarily impact investment into OUR economy. With the ability of capital to easily move across borders, the top earners will invest the capital where it can give the best return for them individually - which may or may not be the USA. It is in the majority's interest for the government to invest and give incentives that are most likely to impact the USA's economy and not just reward the top earners for shrewd investments, regardless of where the capital is deployed.

anthony said...

I believe Top-Down is a much better policy, as it really is the upper class who drive the economy, create jobs, etc. Bottom-Down would encourage people to be lazy and discourage business growth.

Dr. Tufte said...

-1 on Abigail for spelling errors.

I commented in the last post on Americans obsession with taxes, and it comes up again here. Almost everything in the post and comments is about taxes.

Back in 1992 or so I was in a focus group on principles textbooks. Another professor, who I knew only by name, pointed out in a similar discussion that the "Reagan revolution" was really all about microeconomics: changing tax rates, changing the tax base, reducing regulation, and so on. Boy, did my brain light up at that point: if that isn't bottom-up, I don't know what is.

But ... let's think about taxes a bit. The primary implicit contention of our income tax system is that the richer you are, the better off society is having government spend your money than you are: this is what tax brackets do. The quibble between right and left on this is secondary. I'm sorry, but if you're bickering about percentage point changes in marginal rates without addressing why there are brackets at all, you're just a jerk. I'm not even claiming that there aren't reasonable arguments for having tax brackets, just that this ought to be what we talk about.

This ties back to the parts of the thread about whether or not "the rich" will do better things with their money than the government. That's the wrong argument. The right argument is why someone who does become rich is worse at making that decision than they were when they were poor, or why when they go in the opposite direction are we implicitly saying that they've gotten smarter about how to spend. That's twisted.

And note ... personally and professionally ... I am very much in favor of the rich contributing "a lot" because I think that luck is a much larger component of their success than anyone is willing to admit to. I don't have much problem taxing away luck. But again ... a single bracket will collect more from the lucky than the unlucky ... so my basic point about why we need brackets at all still stands.