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Wednesday, October 29, 2008

In Defense of Trickle Down Economics

Senator Obama is fond of saying that the current financial crisis is the final verdict on the last eight years of the Bush administration's economic policy. I think that is far too simplistic, however, one of the unfortunate ideological victims of this financial meltdown is the concept of trickle down economics.

Trickle-down economics" and "trickle-down theory" are terms of political rhetoric that refer to the policy of providing tax cuts or other benefits to businesses and rich individuals, in the belief that this will indirectly benefit the broad population.[1]
The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy."

Because the Democrats and the MSM have been gung ho in demonizing everything that President Bush has done, they have blamed his tax cuts, and the theory behind it...trickle down economics.

In order to make this claim, the Democrats and their MSM allies have bemoaned the stagflating wages under the Bush administration. Of course, bemoaning stagnating wages distorts what happened. As you can see, wages declined in a very steep way for the first two years of Bush's Presidency, and then they have increased on just as large a slope since. They have in fact risen slightly over the course of his Presidency but especially since 2003.

What happened to make the drop so much? It was the perfect economic storm of the internet bubble, 9/11. and the revelations of accounting malfeasance at Enron, Worldcom, et al.

Furthermore, the tax cuts occurred in 2001 and 2003. Tax cuts normally take at least a year and a half to take effect. Bush inherited an economy that eventually wound up in a recession, a dynamic set in motion by the popping of the bubble (and perpetuated by 9/11 and the accounting scandals). Yet, not only was the recession fairly mild but we entered a period of economic boom (one not recognized or acknowledged by the opponents of Bush)

As to the current meltdown, that has nothing to do with the tax cuts. It has everything to do with a speculative market caused by loose monetary policies of the Federal Reserve. As such, the current meltdown has nothing to do with the tax cuts, and thus, the meltdown is NOT a referendum on trickle down economics.

In fact, the worthiness of trickle down should have been set in stone from the results of the 1980's. Reagan created similar tax cuts and that lead to a nearly unprecedented economic revival that lasted for the better part of the next twenty five years. For another example of the power of trickle down economics, Ireland cut their corporate tax rate to 12.5% and this lead directly to an unprecedented growth in its economy.

Trickle down economics works under this simple principle. The wealthy, small businesses, and corporations are the ones that create jobs. The less you take from them, the more jobs they can create. It is a private industry pro growth philosophy. It is the exact opposite of the way in which Barack Obama views the world. His populist message has caught on, and unfortunately, it's because the concept of trickle down economics has been unfairly demonized.


Anonymous said...

From Robert Reich.
Please respond - thanks in advance.

Top-down economics holds that:

1. If you give generous tax breaks to the rich, they will have greater incentive to work hard and invest. Their harder work and added investments will generate more jobs and faster economic growth, to the benefit of average working people.

2. If you give generous tax breaks to corporations, reduce their payroll costs, and impose fewer regulations on them, they will compete more successfully in global commerce. This too will result in more jobs for Americans and faster growth in the United States.

3. The best way to reduce the energy costs of average Americans is to give oil companies access to more land on which to drill, lower taxes, and lower capital costs. If they get these, they'll supply more oil, which will reduce oil prices.

4. The best way to deal with the crisis in credit markets is to insure large Wall Street investment banks, as well as Fannie and Freddie, against losses. This will result in more loans at lower rates to average Americans. (Bailing them out may risk "moral hazard," in the sense that they will expect to be bailed out in the future, but that's a small price to pay for restoring liquidity.)

All of these propositions are highly questionable, especially in a global economy. The rich do not necessarily invest additional post-tax earnings in the United States; they invest wherever around the world they can get the highest returns. Meanwhile, large American-based corporations are doing business all over the world; their supply chains extend to wherever they can find low labor costs combined with high output, and their sales to wherever they can find willing buyers. Oil companies, too, are operating globally and set their prices largely at the point where global supply meets global demand. Additional drilling here creates environmental risks for us but generates the same marginal benefits for consumers in China, India, and Europe as we might enjoy (most likely not for a decade or more). Credit markets are global as well, so the beneficiaries of bailouts of large investment banks and lenders are also worldwide while the potential costs (including moral hazard) fall on American taxpayers.

This isn't to argue that top-down economics is completely nonsensical. America is, after all, the world's largest economy. So whatever helps the top of it will to some extent trickle down to everyone else here, and whatever hurts the top is likely to impose some burdens all the way down.

But in a global economy, bottom-up economics makes more sense. Bottom-up economics holds that:

1. The growth of the American economy depends largely on the productivity of its workers. They are rooted here, while global capital and large American-based global corporations are not.

2. The productivity of America workers depends mainly on their education, their health, and the infrastructure that connects them together. These public investments are therefore critical to our future prosperity.

3. Global capital will come to the United States to create good jobs not because our taxes or wages or regulatory costs are low (there will always be many places around the world where taxes, wages, and regulatory costs are lower) but because the productivity of our workers is high.

4. The answer to our energy costs is found in the creativity and inventiveness of Americans in generating non-oil and non-carbon fuels and new means of energy conservation, rather than in access by global oil companies to more oil. So subsidize basic research and development in these alternatives.

5. Finally, in order to avoid a recession or worse, it's necessary to improve the financial security of average Americans who are now sinking into a quagmire of debt and foreclosure. Otherwise, there won't be adequate purchasing power to absorb all the goods and services the economy produces. (As to "moral hazard," the financial institutions that did the lending had more reason to know of the risks involved than those who did the borrowing.)

Anonymous said...

An another one I found:

Trickle down economics cannot be the ONLY economic logic. Lets assume a closed economy. If trickle down economics was the only policy employed more and more wealth would be concentrated at the top, until people at the top simply stopped "risking" their money on the work of the people underneath. At that poing you'd have the obscenely rich and everyone else. Mexico was a decent example.

TDE was credited for the Reagan economic boom, but improperly IMO. IMO, a LOT more credit should be given to the fact that we sunk a TON of money into weapons and space travel. This infusion of government money into cutting edge technological efforts gave birth to a lot of technological innovations that were repackaged and sold in mass quanties to the public, spurring economic growth. In otherwords, a socialistic infusion of government dollars to spur on the economy --- a New Deal for warhawks.

The Clinton Boom was similarly not the work of Clintonian economic brilliance, but rather was due to the efforts of lobbyists and paid off congressmen and women. The Telecom Act was the result of lobbyists buying favors for their rich bosses who wanted to make easy money doing what the bell companies did. The law forced ILECs to lease their lines to CLECs at wholesale prices. This boom of new local exchange carriers lead a lot of companies to have the customer base to allow dramatic improvements in technology. Tons of telecom employees found their stock shares worth small fortunes overnight. Whole industries emerged out of the now publically available technology from this boom, creating even more taxable "new money" and allowing big chunks of our national debt to be paid off.

Trickel down economics is IMO very bad for America today as we are part of a global economy. It is simply too easy to move money to countries where the cost of living (and hence employee wages) are a fraction of that in the US. In a global economy it makes sense for the government to stack the deck to favor small businesses and local businesses to keep as much money as possible bouncing between the checkbooks of American citizens --- taxable each step of the way.

Antiquated and overstated as it is, Trickle down economics was not a totally worthless concept though when implimented and removed and implemented. The changing of rules does force the rich to pay more attention, leading money to move to more promising and efficienct organizations ---IMO a very healthy status quo in a free enterprise system.

Regarding trickle up economics, you really have to clarify what you mean. In my mind trickle up economics means throwing money at the poor so they gan buy garbage that hopefully the poor and Middle class manufacutures allowing the rich owners to profit.

I think that giving money to the poor is generally a bad idea. The poor will buy food and clothes, but after that, they will truly waste the money. Now some people bottmo out and are poor for a bit and recover. Generally the people who are poor and STAY poor make poor financial decisions. If you give those individuals $200, they might let their kids buy $125 high tops out of ??? guilty feelings? Incompetence? and then wonder how they are going to feed their kids for the rest of the month. I am not hating. I have 2 friends who I have given money to time after time in the past only to see them lavishly waste it in poorly thought out purchases.

I am much for programs that provide benefits or marginal supplies to the poor, not money. I think we would be smart to serve kids 3 square meals a day at public schools and perhaps give basic clothes to a poor kid each semester. I could even see providing health care to everyone and even govm't assistance paid directly to a landlord. I am pretty freaking generous talking about tax dollar usage helping my fellow Americans, but giving money? No.

Consider for a second the popular rebate check strategy that our politicians use to buy votes. The middle class pays an effective 30% tax rate. The rich 22%. The poor's effective tax rate is probably the lowest as many don't pay taxes at all.

The tax rebate thing is (at best) taking money from the people who pay the most taxes (the middle class) and giving equal shares to everyone. Effectively we are not only doing wealth redistribution each time we do this, but we are taking the money from the middle class, not the rich. IMO.

Since we are in debt it is even worse when we did it the last time --- we essentially BORROWED the money to finance a bottom up trickle.

How much of that money was spent on beer, guns, drugs, and other garbage by the braindead dregs of society? How much was spent on survival. How much was thrown into rainy day savings?

mike volpe said...

I don't know how much of what Reich claims is actually a part of trickle down economics. I don't think that trickle down economics holds that one needs to bailout banks. Trickle down economics says nothing about energy independence specifically.

Now then, the wealthy may in fact invest wherever the return is good, however the return is always best in the long term in the U.S. and that will continue for a long time.

Bottom up economics is predicated on the idea that those on the bottom are getting the short end of the tax stick. Of course, given that 40%+ of Americans aren't paying any federal income taxes. So, in fact, we've been in bottom up economics for a long time. Obama wants to double down on it.

The wealthy are the ones that create jobs. They are also the ones that give raises.

I don't see how Reich makes the connection between bottom up economics and productivity. Just because you give poor people more tax breask doesn't actually mean that they will be more productive. Furthermore, the poor are only a small part of overall productivity. Finally, productivity has generally been growing well under the Bush administration.