How Trickle-Down Economics Ruined the Economy and Helped Trump Win

The establishment was good at making big promises, but in the end, they left few crumbs on the table for the middle class

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By John Komlos

The media is inundated with pundits analyzing the unexpected rise of demagoguery. I would like to add my own: the establishment’s utter loss of credibility. Abraham Lincoln’s warning, “you cannot fool all of the people all of the time,” has now come back to haunt them with a vengeance.

It took Everyman on Main Street some time to figure out that they’ve been had and finally revolt — 35 years to be more precise. There has been no shortage of big promises since Reagan’s “It’s Morning again in America,” but in the end, they all left the middle class staring into thin wallets while their manipulators were living high on the hog. The failed big ideas began with Reaganomics. The stimulating effect of its tax cuts was supposed to “trickle down” to the masses, but the flow had the viscosity of molasses and stuck with the ultrarich.

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Under Reaganomics, the ultrarich had their taxes cut sharply — by about half. A millionaire who was paying $700,000 in taxes in the 1970s saw her taxes cut to $350,000 in the 1980s. But what was he or she going to do with the $350,000 windfall? Some spent it on conspicuous consumption, but many decided to fund think tanks and hire economists to support their ideology, while others used the windfall to influence politicians and shape laws. And so the tax cuts became a vicious circle in which wealth begot more wealth and still more influence.

Then came North Atlantic Free Trade Association, initiated by President George H. W. Bush and eventually signed into law by President Bill Clinton. Clinton promised that NAFTA would “promote more growth, more equality… and create 200,000 jobs in this country by 1995 alone.” Of course, he failed to mention how many hundreds of thousands of jobs would be destroyed at the same time, but few noticed such nuances at the time. (It’s worth noting that his economic team was headed by Bob Rubin, CEO of investment mega-bank Goldman Sachs.) Together with globalization and the opening up of China, NAFTA devastated the U.S. manufacturing sector and the middle class with it. And the treaty has a long reach: just last month, air conditioning manufacturer Carrier announced that it will move 1,500 jobs to Mexico to its employees’ bitter disappointment.

Deregulation of the financial sector was yet another big idea that was supposed to be good for Americans, and it was — for the elite. Begun in earnest by Reagan, the process was continued under Clinton who declared many of the FDR-era laws “antiquated.” He abolished the Glass-Steagall Act, which kept commercial banks from speculating on Wall Street with other people’s money. The act was supposed to be a “major achievement that will benefit American consumers, communities and businesses of all sizes.” With amazing shortsightedness, Clinton declared at the signing ceremony that we’re “modernizing the financial services industry, tearing down these antiquated walls.”

Deregulation was in full swing — always framed as modernization or in the name of efficiency. The prohibition on interstate banking was also removed, allowing for the creation of “too big to fail” banks. In 2000, Congress passed the Commodity Futures Modernization Act, which prohibited the regulation of credit default swaps. The elite forgot, however, that short-term efficiency can turn into long-term disaster when the risks in the economic system accumulate. And so we were inching toward the Meltdown of 2008, which wrought havoc among so many members of the middle class.

Bush Jr.’s policies were in a similar spirit. He lowered taxes to the benefit of the 1 percent and closed his eyes to the brewing crisis. When the Meltdown came, the establishment offered trillions of dollars in support of the big banks and its CEOs. Jamie Dimon, CEO of J.P. Morgan Chase, for instance, earned some $17 million in 2009 while the whole financial sector was being propped up at Uncle Sam’s largesse.

In stark contrast, Main Street received a pittance — an extension of unemployment benefits to 99 weeks. Millions lost jobs, were evicted, had to take low-paying jobs or work two jobs in the gig economy. In short, the bailout exacerbated income inequality and continued the hollowing out of the middle class.

As the recession sharpened, Obama entered into office with big promises of change, but he essentially continued many of the policies of his predecessor. He appointed Tim Geithner, a former Bush Jr. appointee, to be Secretary of the Treasury. Geithner now earns an estimated $5 million salary on Wall Street.

With the Federal Reserve, Obama continued to provide a generous backstop to Wall Street with the well-known TARP program. Through the TARP program, the Treasury purchased assets and equity from troubled financial institutions in an attempt to strengthen the financial sector. It wasn’t until Bloomberg LP sued the Federal Reserve that the details of the bailout were made public. The secret loans and guarantees, amounting to trillions of dollars, were meant to get the economy going again, but meanwhile, the middle class had to wait for the unemployment checks or apply for Social Security disability payments.

The graph below shows this development vividly. Each bar on the left represents the post-tax (inflation-adjusted) income, including transfers such as food stamps and unemployment checks, of one-fifth of the 120 million households. Each bar represents 24 million households or roughly 64 million people. The graph shows clearly that the top fifth experienced the greatest and only meaningful increase in income during this time span. A tiny bit did trickle down to the fourth quintile — the upper middle class. But an income growth of 0.5 percent per annum, which amounted to a gain of some $300 per annum, was hardly noticeable.

Komlos growth rates of income

The poorest 20 percent of the population (the first bar) continued to receive food stamps, but with an average annual income of $18,000 a year, they had nothing but discontent.

The two middle-class groups of the second and third quintile grew the least — their income growth is hardly distinguishable from zero. In fact, the third quintile (41 to 60 percent) gained a mere $32 per annum during the 32 years under consideration.

While the hollowing out of the middle class is evident on the left side of the graph, the right side of the graph breaks down the growth rates of income for the top 20 percent into four groups. Here, it becomes clear that the top 1 percent was the primary beneficiary of economic growth. Perhaps some of the growth did trickle down, but not much beyond the other members of the top 20 percent.

The anger that fuels Trump’s candidacy runs deeper than this graph indicates. Relative income matters, and the utter unfair bailouts of 2008 rescued the 1 percent. It is one thing not to be able to afford an iPhone if no one else has an iPhone, but it’s an entirely different feeling if the super rich flaunt not only their latest model, but their designer handbags, private jets, yachts and the other accoutrements of conspicuous consumption. Envy turns into desperation if you’re anxious about your job security, behind on credit card payments, drowning in student-loan debt or paying overdraft fees all while working part time or in the gig economy. Hence, I think that the graph below is a more accurate reflection of the welfare of the five income groups. Psychologists have shown that how we feel about our life — our life satisfaction — is reference dependent: Relative deprivation matters a lot, as we compare our welfare to that of others. The graph below assumes that people use the fifth-quintile group as reference and compare their own income to that of the top group.

Komlos growth rates in welfare

In my view, this graph is the real clue to Trump’s success: the growth rate of welfare is negative for all groups except the super rich. It is as simple as that. The rest of the society was left behind for more than a generation.

We have had a long string of very big promises from Reagan to Obama. Tax cuts, trickle-down economics, deregulation, globalization and NAFTA and bailouts all conferred tremendous financial benefits on only one group: the ultrarich. They led to the “hollowing out” of the middle class. So wealth and its concomitant, political power, became as concentrated as it was during the era of the Robber Barons at the turn of the 20th century.

So why Trump? Trump promises to bring back jobs that were lost to China and Mexico. He promises to make America — the middle class — great. He uses minorities as scapegoats — a standard strategy for demagogues to attract the support of those who have lost status and are anxious about the future. He vilifies women, perhaps in an attempt to appeal to those men who have lost out to women in the workplace.

And he is rich, which many take to mean he is successful in business. Why should he not be successful in helping them regain the glories of the past? This appeals to the anxious multitude who have lost income and status and respect and are struggling to keep afloat. Bigotry, prejudice, sexism, racism — all this matters not. Important to the disaffected Trumpists is that America and their place along with it will be resurrected to its former glory when incomes were decent, they were not swimming in debt, and women and minorities knew their place in society.

The establishment was good at making big promises, but in the end, they left few crumbs on the table for the middle class. But still the establishment is surprised by the middle class’ anger, by Trumps appeal. This is a generalizable rule: elites are endangered by excessive greed. And being out of touch to the last minute is not uncommon at all. Hosni Mubarek was surprised by the Arab Spring. And prior to his execution, Louis XVI proclaimed that he “always acted from my love of the people.”

Originally published here.

2016 August 14

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  • commonsensual

    It was nice to read a deeper analysis than the standard comments that Trump’s supporters are just stupid. But, why are you saying that Trump villifies women, when he was the first one in real estate to hire them in New York? From New York Time’s fabricated article which Trump’s former women employees and partners said it was a setup? Why is his message racist when he talks about enforcement of the existing legislation to keep out drugs and crime? Trump actually changes the far-right narrative into a more mainstream agenda. He says he is in favor of legal immigration. He talks about tax cuts for business while taking down Wall Street. He wants to renegotiate NAFTA, the very cause you just mentioned of deindustrialization.

  • Drew

    I agree with Commonsensual below. If Anything the Clintons treat Women with far more contempt. Hillary supported Bill Clinton no matter how many women he abused his position and power to take advantage of sexually.

  • stevelaudig

    North AMERICAN, not Atlantic, if memory serves. A niggling point to be sure.

  • George H. Blackford

    You don’t have to be an economist to see that all of the most prosperous countries of the world leading up to the current crisis devoted a substantial portion of their economic resources to the production of government goods and services or that the vast majority of people who live in countries that do not provide the kinds of government goods and services offered by the prosperous countries live in abject poverty.

    This is no accident. If history tells us anything it’s that a capitalist system cannot prosper in the absence of government provided infrastructure and social insurance, and, yet, for the past thirty-five or forty years the powers that be in Europe and the United States have striven to undermine the ability of governments to perform these essential functions. Their success in this regard has led to the greatest catastrophe since the Great Depression, and it is fairly clear to anyone who thinks about it that their continued success cannot and will not come to good. See: and

  • This piece is remarkable: I am not sure I have seen a more concentrated collection of leftist cliches and tropes in one place before, Bravo!

    • Eli Levine

      Why dismiss things that you disagree with as “leftist” when the evidence is right there in front of you?

    • kit robbins

      Unfortunately that is the very sort of head in the sand right wing response that is fueling the very resentment and disatisfaction that you would say is not justified. But the problem is that whether you like it or not the resentment is there and to avoid dealing with it you are promoting the very Trumpism that you would probably consider to be anarchistic, to a limited degree.

  • Patrick cardiff

    These are my opinions and do not in any way reflect the opinions or stances of my employer.

    This piece was originally published back in April ’16 with PBS NewsHour, airing now here for the Economics crowd: I think we’re at least an argumentative group, sometimes academic and often we rely on fact, or at least logic. So this is a nice summary of the main historical policy changes that situate us in the now. I can’t be sanguine about the suggested mechanisms by which aggregated change affects the masses – this smacks of the “priesthood of Economics” – pronouncements which generally fail for randomness. That’s the problem with macro evidence – it’s usually useless for prediction of details and everyone should know that.

    If you’re left of the political spectrum (can I say that here?), you’re generally wary of the “business class,” am I right? Wouldn’t hard times make a businessman less electable? I mean, you have all these people – immigrants, pro-labor, the 99%, the unemployed, the discouraged workers – many someways dissed by business. Just asking.

    I’m a little concerned about the DATA sources, only because I would like to make my own comparisons, I would like to replicate the study, and I don’t know what post tax income he used, whether he deflated with the CPI-U, or what. And I’m particularly interested in the “welfare” recipient measures, where they come from. I am sure he did not collect this income information himself. I’m not doubting any of this, but I would LIKE to see it for myself. I would like to trust these conclusions as an empiricist, that’s all.

    About his thesis, that people are attracted to TRUE change from the status quo, when the status quo is a REAL DRAG, is no doubt compelling. But the problem is, TRUE change can take an infinite numbers of forms: why some non-politician in a hairhat who is Just OuttaThere? Why not someone else, say, … , Anne Hathaway. I mean, she’s smart. She’s nice. She identifies!

    I would prefer to believe that “bigotry, prejudice, sexism, racism” DOES (still) matter. Social changes happen gradually and on the margin. It’s not like everyone woke up and said “we’ve been governed by the wealthy for the last 32 years (at least)!” I hope that Economic conditions – income, welfare of the lower quintiles, the money you spend at Kroger, etc. – will correlate well with voters when it comes to choosing a president. But the Economy is only one issue. And the President (we have seen) is only one person. The November 2016 outcome itself will be blah I think. Establishment versus nutty as a squirrel. I think we need to take things a little less seriously with respect to what Econ can actually DO. Other people should be anxious about coddling the aristocracy, or the new trends in demagoguery and fascism. One thing you can wonder about history is this: why has money always come before people? We need to get this country to work and we need to get business paying living wages plus.

    Because there’s one thing for something to happen, and there’s another for its effect. Like, would NAFTA make me so psychotic that I vote either way? I dunno. Sure and I’ve “lost status and (am) anxious;” but that doesn’t mean I’m gonna go push the “Elect the Crazy Candidate” button.

    I’m discouraged by the discourse on Evonomics lately, btw., as evidenced by many of the comments below. If you don’t like something say why or keep it to yourself. It seems “One will never convince a person who has already convinced himself.”

  • kit robbins

    Well done John. I agree with your assessment. I am a New Zealander who follows US politics with interest. The problem with politics in the US and with the view of those who naysay your point of view is that whilst it may be legal for the rich to get richer and the political elite to become more powerful, the legality simply does not wash with those who are left behind.

    It is like the driver of a vehicle who claims he is in the right. Their is no point just being and claiming to be in the right if it means that the truck that is in the wrong is going to kill you. Being right and dead is not a win.

    The political establishment cannot keep on thinking that they can consider the voting public as idiots to whom they need only throw crumbs from time to time. Their comes a time when that voting public cottons on to the fact that they are being had and as an avenue through which they can vent their frustration they turn to a Trump or a Le Pen. Forget that these outliers are a bit nutty ( as was Hitler). The fact is they provide a voice through which the disenfranchised feel they can communicate their frustration.

    And I think their frustration is justified. Today I read that the Clinton Foundation had managed to eek US$156 million out of 85 individuals or groups who had sought assistance from Hillary whilst she was S of S. That is absolutely preposterous. Yet Mark Toner, a state Dept official comes out and supports Hillary by suggesting that to imply that such payments are anything other than legitimate or legal is in his words ‘outrageous’. When will these guys learn. WE ARE NOT STUPID. Toner is like the car driver. He might be legally right but what is the point if the morality behind his legally right is recognised by the masses as being sufficiently flawed that they consider him and those he supports as being untrustworthy and corrupt. And that is the problem. The political elite just cannot see that the way they behave, albeit legally is void of moral fibre.

    In New Zealand our perceived middle ground government, now in its third term is actually in the same political cubby hole as Bernie Sanders. It provides much in the way of social support and liberal agendas and private money and politics are simply not allowed to mix. And whats more, people like myself who are in the top 10% of earners are proud of our liberal and socially structured formula. In being so we avoid the build up of dissatisfaction and potential anarchy that currently pervades the US, and we do not have to deal with the presence of a Trump like figure who lets face it, represents the left out..

    So please, Hillary, Barack, Paul Ryan and all their political cronies, wake up!. You can fool some of the people some of the time but you are not going to succeed in fooling all of the people all of the time.

    And whats more, if the left outs dont get their way with Donald this time round their next leader is likey to be ten times worse.

  • BetterFailling
  • Димитър Димитров

    The big problem is that the effects and defects of globalization cannot be contracted by national policy. Failure is global.