In 2016, before the primaries, I went canvassing in New Hampshire. I’m not going to say for whom or what I was canvassing, but several people told me that if it came down to Bernie versus Trump, they’d vote for Bernie, but if it came down to Hillary versus Trump, they’d vote for Trump. Bernie was ahead of Trump by 10 points more than Hillary. Clearly these voters were not going to vote for an establishment candidate of either party.
Trump and Bernie both had populist economic platforms. Trump (net worth then low billions, annual income taxes paid $750) blamed immigrants and trade. Bernie (net worth under a million, $35,868 income taxes paid on income of $240,610 in 2015) blamed a shift in income and wealth from the middle class and poor to the rich. Trump’s solution was to clamp down on immigration and raise tariffs, Bernie’s was to tax the rich and spread the wealth through various means.
The evidence on a shift in income and wealth to the top of the top 10% in the US is crystal clear, we’ve looked at that in detail in this chapter. Lower taxes, better tax shelters, and higher profits have been the mechanism by which income and wealth have moved from the middle class and poor to the wealthy. Lower taxes were achieved by political means during and after Reagan. Higher profits have been made possible partly by labor’s poor bargaining position in the marketplace (supply and demand as always, but also the decline of unions).
To what extent is labor’s poor position the result of trade and immigration versus automation and other uses of capital to reduce the demand for labor? This is key to understanding whether Trump’s or Bernie’s agenda is more likely to raise your income if actually carried out.
We’ve looked at that question in great detail in this book. Before we recap the general picture, let’s look at agriculture. Agriculture historically employed 80% of Americans in 1800, 40% in 1900, and 21% in 1930. It now directly employs less than 2% of workers. This decline was certainly not due to trade or immigration, it was due to immense improvements in the productivity of agriculture. Technology improved and the demand for labor fell. Fortunately for agricultural workers, opportunities to work in manufacturing were expanding. People moved from the country to the city and worked in these new jobs. Of course, this labor was “exploited” (actually just paid what supply and demand dictated under working conditions allowed by the laws of the time), and it took unionization and the legislation of the first half of the 20th century for factory workers to get a decent life and living. Industrialists fought unionization and New Deal legislation tooth and nail, but in the end the economy boomed, the middle class grew, and business expanded along with it.
The picture in the broader economy over the last 50 or so years is similar to the earlier story of agriculture. While a third of workers worked in manufacturing in the 1960’s barely 10% do now. Automation and increased capitalization of industry is far and away the biggest cause of that decline. The US is still a manufacturing superpower, just like it’s still an agricultural superpower, it just takes fewer workers to do that manufacturing.
Eighty percent of us now work in “services”, a huge category, where, as always, supply and demand determine the wages of any type of labor. Automation, capitalization, and technologies such as artificial intelligence continue to reduce the demand for labor, and consequently keep pay in check. Failure of incomes to keep up with growth is not caused by trade or immigrants, nor will it be fixed in the long run by increasing tariffs or removing undocumented migrants. The state in the US with the highest percentage of immigrants is California. California and Texas lost the most jobs due to the expansion of trade with China. Neither comes to mind as an economic basket case. With unemployment at a historic low now in late 2024, one might as well speak of jobs “gained” from trade and immigration. Trade only happens when it brings a lower price, and prices are lower now, in some cases much lower, because of trade. Industrial policy for strategic reasons such as that included in the Inflation Reduction Act make some sense. Tariffs on the other hand increase costs. Immigrants are competitive with certain types of labor, but in the bigger economic picture, they are also consumers, taxpayers and workers. It makes sense to control the flow of in-migration but expelling settled migrants not so much.
The point is that we’ve been here before. The earlier industrial revolutions simultaneously increased productivity and the country’s wealth but at the same time greatly increased inequality. Think of the “Monopoly” guy with his top hat and monocle. The reforms of the New Deal helped increase the bargaining power of labor and spread income and wealth more evenly. But over the last 60 years, inequality has again increased. The country has become incredibly wealthy but at the same time the share of national income earned by the middle class and the bottom 50% has shrunk. It is only after taxes and transfers that the lower half of households has maintained a claim to 20% of national income. Meanwhile the middle-class share has actually declined while the top 1% share has increased accordingly.
Instead of imposing tariffs on trade, which is anti-free market and increases prices, a much easier and more effective method of tackling inequality is to follow the model of the New Deal. Increasing taxes on the rich back to the boom times pre-Reagan immediately reduces inequality. That money can then fund many things such as low-cost health care for everyone, and as I suggest above, a universal basic income to supplement working income.
The New Deal was declared “socialist” by those who opposed it, but in fact it ushered in a period of incredible business growth and a huge expansion of the middle class. Taxing the incomes of the rich does nothing whatever to change the capitalist market system that is one of the key drivers of our wealth. Here is a thought experiment to make this clear:
Right now, as we’ve seen, the rich often get most of their income from owning shares in the US’s huge public companies such as Microsoft or General Motors. Often, they inherit that stock. If the estate tax redistributed those shares at death so that everyone in the US owned them, nothing whatever would change in the running of Microsoft or General Motors. They would not be owned or run by the government, and their managers would be incentivized to increase sales and profits in exactly the same way as now. But the dividend income from the stocks would be distributed more widely. The bottom 50% who own essentially nothing right now, would finally get a share in America in a way that homesteaders once did when land was handed out free to settlers.
A glance at the charts I provided above should reassure the middle class that none of this need come out of your (and my) hide. We’ve seen that if national income, which is income after all expenses of running businesses but before taxes, were distributed evenly, all households would have had $144,000 in income in 2019 and more now. Since realistically the playing field is not going to be anywhere near levelled, if you make less than some arbitrary income like $250,000 before taxes, you would either pay the same in taxes or less. Above that you would pay more in taxes, with the amount increasing as incomes get higher.
The above discussion should have made it clear that if carried out, the direct approach of taxing the rich and using that income to effectively raise the incomes of, say, the lower 50% of earners is simple and effective. We did it before and it worked for everybody, including business. Trump’s agenda includes more tax cuts to add to the ones his party passed during his first term. Those tax cuts greatly increased the deficit as we’ve seen, and about half of it went to the top 5%, increasing inequality as well. He didn’t talk much about these cuts for the wealthy, focusing instead on kicking out undocumented migrants and increasing tariffs, particular on goods from China. If you’re in the middle class or the bottom 50% will that help you? Kicking out undocumented migrants might temporarily raise wages in some low paying jobs, but after that we’re back to the same situation. Tariffs on stuff from China, like a great many things you buy in Walmart, will simply raise prices or force Walmart to buy the products from another low wage country.
It is highly unlikely that Trump’s agenda, if carried out will actually do anything for anyone below the top 10%. Deficit spending may goose the economy further, but that is like putting a shopping spree on your credit card. Live high now and pay for it later. Like with lower Social Security and/or later full retirement benefits. The Trump economic agenda in short, is a fantasy designed to appeal to common misconceptions of the roots of economic inequality in the US, while in fact increasing it. Not particularly surprising for a billionaire with billionaire friends.
As the Eagles sang in Hotel California, “This could be Heaven, this could be Hell”. The US is a very rich country. With a more equal distribution of the fruits of productivity we could all live comfortable lives without working multiple jobs. We have the resources to provide a universal basic income to supplement working incomes. We could have universal preschool and free higher education. Medical care could be free, or almost free, as it is in most advanced economies. Nobody needs to be poor, let alone homeless, in the US. Vast differences in income and wealth are not healthy for any community and a country is a community.
Or we can proceed down the road we’ve been following since Reagan, with more and more unequal distribution of income, three men owning more wealth than the bottom 50%, less and less taxation of the rich, huge deficit spending, and virtually all the increase in national wealth and income going to the top of the top 10%. A national basic income would mean that most of the “means tested” government programs that keep half our country barely afloat could be scrapped along with the bureaucracies, mostly at the state level, necessary to implement them.
The last election, incredibly close in popular vote, was about more than economics of course, and I understand that. I do believe, and polls support this, that a sizeable majority in the US are for policies that will lower the extremes of income and wealth in the country regardless of differences over social issues. Unfortunately, a campaign of “divide and conquer” based on cultural issues has been waged to make possible the vast economic shifts we’ve documented. Once upon a time in this country, representatives from social conservative areas and those from more socially liberal urban areas could get together to support populist economic programs. It is time for that consensus to reemerge.