Of Carnival Games and Economics

Let's pretend for a moment that I told you that you could have washboard abs by doing 50 crunches per day for 6 months. You are told that no extra dieting or exercise would be required and that you need only do those crunches as instructed. So you think, "that's not too bad" and set about earning your washboard abs. Two months pass by and you note that no change is appearing in the mirror yet, but I assure you that if you stay the course those abs will be popping in no time.

After four months you are growing increasingly skeptical. You actually appear to be even flabbier in the mirror. We took some measurements (waist, weight, body fat) before you started the "program" and all of those show that you are failing to progress towards your 6-pack. However I am so confident of my methods. I tell you to continue the program, after all it's only two more months, and the results will come.

After six months we measure you again. You are fatter, heavier, and in worse shape than when you started. Your abs look like somebody popped a can of biscuits in your waistband and your lower back is now aching daily. You stomp up to my door and tell me that I suck as a coach and you want your money back. I respond by saying, "No, no. I see the problem here. You are just a 'hard-gainer' or you have some thyroid issue. I'll tell you what, I'll write you another program, totally free, and you'll get those results afterall." You are still furious but are too out of shape and tired from walked to my office and yelling to punch me before I tell you, "let's up the crunches to 75 per day and increase the time to 8 months". What would you do?

Whether you are the type of person to punch, sue, or just take your business elsewhere isn't the point here. The point is, a person sold you on a method, you tried that method exactly as prescribed and it didn't work worth a damn. The ultimate response to that should be to try a different method and mark that one, at least for you, as bullshit.

Let's move this analogy to Reaganomics. In 1980, Ronald Reagan was sworn in as the 40th President of the United States. He didn't come to power (and who does?) at a simple and easy time in American history. It wasn't long since Richard Nixon had resigned office in disgrace. Jimmy Carter had served in the White House during an energy crisis and appeared totally incompetant to the country. We had a crisis of confidence in our federal government. In many ways, Reagan was the perfect person to deal with this problem.

He was a brilliant speaker who could inspire the country to believe in itself and in him. As much as anything else, his core political belief could be boiled down to his famous quote "Government is the problem." That sat well with a nation who had grown increasingly skeptical of a government who had muddled through Vietnam, still had forces in Korea, was faced by a super-power in the Soviet Union, and was hampered with scandal and controversy.

We were also in a recession. President Reagan's over-arching economic philosphy can be explained as "trickle-down" economics. The theory here is that the wealthy are the main job-creators. They invest in business, or start one of their own, and hire folks to work there. To better unleash this growth potential, Pres. Reagan instituded large tax cuts for the top income tax brackets. When Pres. Reagan took over in 1980, the top tax bracket (then it was for those making more than $215,000) was 70%. Pres. Reagan raised and lowered taxes throughout his presidency, but when he left office in 1988 the rate was 28% for incomes greater than $150,000.

Now, in case you magically care to read this drivel, but don't understand math at all, that's a 42% cut, plus a lowering of what considered a "top" tax bracket.

For the purposes of this blog post, forget about the fact that Pres. Reagan ran very large deficits, that he ran up significant debt, and about the argument over the Laffer curve. Let's focus on whether these policies led to economic growth and for whom the grown occured.

The graph to the left shows the growth of mean (in red) and median (in blue) incomes over the last 60 years. The point here is that from 1947 to around 1980 the two measure appear to be in lock step. But after 1980 the mean appears to rise faster than the mean and the two remain separated today. Why is this? What is the difference between the two?

Mean is another word for average. Let's say that you had 10 people sitting in a bar whose average incomes were $20,000. In walks Bill Gates. If you re-calculated the average you'd notice that it goes way, way up. Despite that, those 1st 10 folks aren't any richer. It's simply that Wild Bill makes so much that he drove up the average himself.

The median income means the value that falls right in the middle of a range. Let's say you had 5 numbers (2, 4, 6, 8, 10). The median of that range is 6 (the one right in the middle of the range). If we changed the numbers by adding in a "Bill Gates value" (say 2, 4, 6, 8, 99,000) the median of that set would still be 6. Therefore the median income is a more useful measure to determine whether the middle-class incomes are growing or not. The mean is rising faster on that graph because there is a larger gap between middle-income and very rich people. Is that really true?

The above graph compares CEO pay (including bonuses and other benefits) to the average hourly worker's pay. Note that over time the ratio has exploded from 24 times to almost 300 times in 2005.

One final picture:

GDP is just a way to measure the growth of the economy. This graph shows that GDP has increased about 45% since 1973. The mean income has increased about 32%. And the median income has lagged at 15%. In other words, middle-class families have not seen nearly the wage growth that upper level earners have seen.

Pres. Reagan no doubt did what he felt was best for the country. We have also experience GDP growth over that time frame. He followed a theory of economics just like liberals do, and theories need data and experience to confirm or disprove them. The puzzling factor here is that we've had 30+ years of Reaganomics. We are where we are. We've had 30+ years of deregulation and cutting taxes for the top earners. We are where we are. At what point are we going to quit doing those damn crunches and try something else?