1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/9885/the-whole-trickle-down-thing/

The whole trickle-down thing

May 2, 2009 by

For years, free market theory of one sort or another has been caricatured as “trickle down economics.” The idea is that we believe that if society protects the wealth of the rich, and let’s them keep more of their money, the blessings will eventually trickle down to the poor and middle class. In some ways, it is not an entirely indefensible view, but of course the phrasing is designed to somehow elucidate the elitist absurdity even before arguments are heard. One thing I’ve learned is that when anyone says your position amounts to trickle-down economics, there’s not much else they are willing to discuss.

But it occurs to me that there might be a way to turn this phrase back on those who push for government intervention, though I’m sure someone else has observed this before. The real theory of trickle down is actually advocated by the interventionists and socialists. They think that if we tax everyone and give money to the government, it will eventually come trickling down to the middle class and the poor. Same with power. If we give more power to the state to regulate and run our lives, this power will trickle down to the rest of us.

But if you want to talk of implausible theories, this is surely it. Government’s power and money doesn’t trickle down. It takes money and pours it into ever more bureaucracy and gives it to the elites. Its power grows and grows at the expense of society. This is the experience of the whole of human history.

According to Wikipedia, this might be closer to the original meaning of the phrase in any case. Will Rogers wrote of the New Deal that “money was all appropriated for the top in hopes that it would trickle down to the needy.” That sounds like a summary of Obamanomics.

{ 24 comments }

AJ Witoslawski May 2, 2009 at 4:53 pm

You could also go with those savvy bumper stickers by calling statism “trickle up poverty.”

David Spellman May 2, 2009 at 5:52 pm

Trickle down economics is where the burden of taxation is reduced on the rich and stays the same or greater on the middle class and the poor. It is attempting to put a positive public face on stealing from the poor and letting the rich get a free ride.

A real economic theory would eliminate taxes on everyone. No trickle down–just a vast outpouring of prosperity. The government is like a charging elephant–and like the old joke says, you stop a charging elephant by taking away his credit card.

Tim May 2, 2009 at 7:01 pm

In the version of trickle down economics that you’ve described, no one would feel belittled at others succeeding more than them, having more, or being able to achieve more with their time and money.

Because when the government impedes the progress of those ahead in the race and disenfranchises them for the “good of the rest of community” and peddles it with sweet sounding words like equality and social responsibility, THAT is what the public wisdom considers as social justice.

AJ Witoslawski May 2, 2009 at 7:11 pm

Trickle down economics is where the burden of taxation is reduced on the rich and stays the same or greater on the middle class and the poor.

I guess Regan, Bush I, and Bush II weren’t followers of “trickle down economics,” since they never lowered taxes for only the rich.

Lee Kelly May 2, 2009 at 7:22 pm

It’s a metaphor, and not entirely misleading when not stretched too far.

The wealthy are expert savers, and future increases of prosperity depend upon their savings. The rewards they reap from everyone else reflect the service such expert saving brings.

Suki May 2, 2009 at 7:31 pm

@ Mr. Spellman May 2, 2009 5:52 PM,

I am pretty darn new to this free market stuff, but even I know your comment is pure nonsense.

Mr. Tucker, thank you for your insight.

Stranger May 2, 2009 at 8:56 pm

It’s all based on a Keynesian myth of circulation of money, that if you give 10 trillion dollars to bankers then the bankers will buy things and the poor will make money from their jobs. But of course the scam is that the 10 trillion dollars that was given to the bankers was stolen from the poor through inflation, so the act of giving them that money made the poor poorer.

If we are talking about income tax, it is not necessary to speak of indirect wealth effects as an income tax on high incomes has a direct wealth effect on the poor; it makes hiring high-income producers like doctors more expensive for everyone and makes them poorer.

newson May 2, 2009 at 9:39 pm

TRICKle-down” implies a skepticism that is not undeserved. loose monetary policy combined with lowered tax rates and expanded government expenditure do favour the asset-rich over wage-earners, whilst the debt is bequeathed to the future. i prefer the term “voodoo economics”, which is more accurate.

DS May 3, 2009 at 8:37 am

As an ex-Supply Side Conservative/Republican, there is a kernal of sound economics in the pure supply side theory, in fact it is Austrian at it’s most basic: Savings and Investment drive productivity which causes REAL economic growth which increases everybody’s wealth. Taxes reduce saving and investment, and since the “rich” save and invest more (and in our current economy they are the only savers) it makes sense to tax them less if you want to enjoy the fruits of this mechanism to make everybody better off.

The problem is that once it got to the application phase in Washington it got corrupted (like everything does) and mangled with Keynsian nonsense and looked more like Austian economics on acid. Ronald Reagan ran in 1980 (and for at least a decade before that) as a spending slashing, regulation reducing, budget cutter. The original message was that reducing the budget and regulations would allow for lower taxes and more money to be kept in the private sector to create productivity enhancing investment and economic growth. Reducing regulations was supposed to free up the market to work more efficiently and enhance productivity.

What actually happened was that tax rates were cut (then raised back up again) and cutting spending was put on the back burner. Reagan’s massive increases in military spending were horse-traded with the Democrats who ran the Congress to get welfare AND warfare – just like Rothbard always said it would. This created huge deficits that had to be financed at 15% interest rates, which just made it worse. As all political hacks must, this had to be justified and almost instantly the talk turned to Keynsianism to justify the huge deficits – just like they did in the 30′s. All of a sudden “strarve the beast” was replaced by “deficits create economic growth” and supply-side economics ceased to an economic theory and instead became a political theory – which means it was no longer bound by reality in the usual sense. Today your typical supply sider doesn’t even understand that increasing government spending IS an increase in taxes, no matter what the tax rate is. Cutting tax rates, increasing spending and borrowing the difference IS a tax increase. And the favorite argument of today’s supply sider is that reducing tax rates increase government revenues – in other words they are BRAGGING that their theory raises taxes. WTF????

The sad truth is that supply side economics gave us more government spending AND more taxes, and despite Reagan’s reputation as a de-regulator, the number of regulations went up and not one single government agency was abolished. I give Reagan some benefit of the doubt because he had to work with a Congress that was utterly opposed to the rhetoric of economic sense at the base of the program. In the end he horse-traded away the fundamentals in order to get more military spending. Had he lived up to his campaign rhetoric we would all be much better off today.

Unfortunately, we as Austrians are saddled with this sad legacy – Supply Side Economics, by humming the tune of Ludwig von Mises but replacing the lyrics with John Maynard Keynes, has done us more harm than any Socialist ever has.

Russ May 3, 2009 at 8:53 am

What’s wrong with trickle-down economics? I live in the Detroit area, and when times are good for the Big 3, yeah, it trickles down to the rest of us. I heartily wish it was tricking down more now. That doesn’t justify corporate welfare, no, but it does justify lowering taxes on corporations as a real form of economic stimulus, even if personal income taxes on the middle class and poor are not reduced. I’d rather be employed and taxed moderately, than unemployed and taxed at a low rate.

As for “If we give more power to the state to regulate and run our lives, this power will trickle down to the rest of us.”, I don’t think that this is what the average Obama-voter is thinking. He is thinking, “If we give more power to the state to regulate and run the lives of *the rich*, the *money* from this will trickle down to *me*”. He doesn’t think his life will be affected, only the lives of big blue meanie capitalists; it isn’t primarily power he is thinking about, just security; and there is no “us” involved in his thinking. He is simply too ignorant and short-sighted to understand that there is more security in trickle-down economics than in socialism.

The correct metaphor for arguing against socialism is “Killing the goose that lays the golden eggs”. Even children understand this story when they hear it. The trick is making adults understand that real-world economies work the same as the fairy tale.

jesse May 3, 2009 at 9:50 am

lol, so true Jeffrey…
This is precisely what John Zmirak blogged (courtesy of LRC) on in Oct, ’08

“Privatize benefits and socialize costs for long enough, and soon the people will insist on socializing the benefits too. Which will then mysteriously trickle down Uncle Sam’s leg.”
http://www.takimag.com/sniperstower/article/damn_it_feels_good_to_be_a_banksta/

Dick Fox May 3, 2009 at 11:06 am

DS,

Sorry, but you only thought you were a supply sider. Your post demonstrates that both while you considered yourself a supply sider and even now, you are actually a conservative demand side economist.

Jude Wanniski in his great book The Way The World Works clearly demonstrates the difference between the supply side and demand side models.

Demand side is all about managing the economy through monetary manipulation.

The first group of demand siders are mercantilist demand siders (Keynesians). They are all about putting money into pocketbooks to stimulate the economy. There are liberal mercantilist demand siders (generally Democrats) who believe that prosperity can be created by putting money into the pocketbooks of middle and lower classes, because in theory they spend more on consumption and less on savings and so the multiplier can work more efficiently. Then there are conservative mercantilist demand siders (generally Republicans) who believe that prosperity comes from putting money into the hands of producers – the rich – to stimulate the creation of capital and jobs (trickle down theory).

The second group of demand siders are the monetarists. They believe that by manipulating the money supply you can control the economy. You expand the money supply when the economy is slowing and contract the money supply when the economy is growing to prevent over-heating (Milton Friedman and some Keynesians). Some in this group suggest a policy of a strict monetary rule of money growth, 2-4%.

Both of the demand side theories are confounded by stagflation, stagnation with increasing unemployment.

The supply model holds that all economic transactors are actually producers and their position as consumers is simply the exchange of their production, including the exchange of labor. Supply theory holds that it is important to remove barriers, or wedges, that hinder traders from engaging in unencumbered transactions.

Most important to the supply model is not the quantity of money but the the quality of the unit of exchange (see Mises and contrast to Rothbard). Under the demand model changes to the unit of exchange will benefit either debtors at the expense of creditors or vice versa. This poisons the relationship between debtors and creditors (traders) creating a wedge. Additionally and contrary to much of popular opinion, whether the currency appreciates or depreciates interest rates will rise. As the currency appreciates the debtors will benefit and the creditors will increase interest rates to compensate for their loses while when the currency depreciates the general price level will rise and so interest rates will rise to compensate for the inflation.
The supply model holds that the quality of the unit of exchange can only be maintained under a price based monetary system not under a quantity based system. It is impossible to know either the supply or demand for money. Neither can a currency maintain its value relative to a basket of goods because the basket by necessity is arbitrary. For over 2,500 years gold has proven its worth in determining the price of a currency, something that can be known. Using a price based monetary establishing a specific value of exchange (price) between the currency and gold is the best system to maintain the quality of the currency and facilitate trade.

Supply side is most often connected with tax cuts by those who do not understand supply side theory. The supply model does recognize that the law of diminishing returns applies to tax policy, but this is not unique to current economic theory. This law of diminishing returns has been recognized by political theorists for centuries, but because it has been significantly ignored in recent years it has been reintroduced to economic theory in the form of the Laffer Curve. This theory holds that there is a point of taxation where increasing (or decreasing) taxes will reduce economic prosperity. The optimal point is called point “E” and is a constantly moving target. If the political class moves taxation into the prohibitive range of the Laffer Curve (or leaves taxation at a level that becomes in the prohibitive range of the curve when point “E” changes) an economic decline will follow. Contrary to popular myth in the supply model not all tax cuts are beneficial.

In summary the demand model cannot deal with both stagnation and unemployment simultaneously because you cannot both increase and decrease the money supply at the same time, while the supply model is about removing wedges to trade.

The relationship between Austrian Economics and supply side economics is strong, especially the principles of Mises. Where the two divege is that in recent years many Austrians have moved to follow the demand model especially Milton Friedman and the quantity theory of money. Many Austrians define inflation in terms of the quantity of money rather than the quality.

shaneinwy May 3, 2009 at 11:20 am

I love how Mr. Tucker uses seemingly ridiuclous arguements to show the stupidity of policy that has been enshrined and legitimized by ivory tower speak.

However, this is an crucial point that must be made. I spent a good portion of last week in the company of one Ed Fulner (I know I’ve mispelled his last name), the president of the Heritage Society. Multiple time I asked him and others from Heritage when we can expect the American “right” to distinguish between pro-market policy and pro-business policy. There was much beating around the bush, delaying, Obamabashing, but NOT ONE SINGLE ANSWER. These people really are clueless as to the nature of capitalism proper.

DS May 3, 2009 at 11:38 am

@ Dick Fox:

“Sorry, but you only thought you were a supply sider. Your post demonstrates that both while you considered yourself a supply sider and even now, you are actually a conservative demand side economist.

Jude Wanniski in his great book The Way The World Works clearly demonstrates the difference between the supply side and demand side models.

Demand side is all about managing the economy through monetary manipulation.”

I don’t think the economy aught to be “managed” at all, so I don’t know what you’re trying to imply. It is hard to tell what your point is, but Austrian Business Cycle Theory is certainly not Friedmanite – who was an interventionist statist who believed in the manipulation of the economy by government, in his particular case through the use of increasing and decreasing the money supply.

That most certainly is NOT the Austrian viewpoint.

Ben Ranson May 3, 2009 at 5:23 pm

“Trickle down” economics is one of the many metaphors in popular usage which equate money with water. Others are cash “flow”, “pumping” money, “liquidity”, “unfreezing” the credit markets, “soaking” the rich, “underwater”, capital “infusion” and “pooling” assets. Fun can be had by combining them: When pooled underwater mortgages threatened to dry up the banks’ cash flow, Washington threw them a lifeline by pumping in capital. At first, the TARP appeared to thaw the frozen markets, but it was only a return of the bubble. The Fed was unable to soak up the excess liquidity and the banks went belly-up as total meltdown ensued.

chris May 3, 2009 at 7:46 pm

Don’t be fooled by the small stuff.
Get a bigger picture, a paradigm shift of history.

It is not everyday that you read something and it changes your whole conceptualization of the world.

The two documents below will do that.
The implications will challenge how you look at politics, economy, history, finance, war and terrorism. Many persons in the documents are well known; many are right now in pivotal positions of politics and finance. These people do shape YOUR life and that of our children right now. The details are researched and referenced. The consequences would be beyond belief.

The two documents are long and some parts not easy to follow and to digest. Don’t give up, just read on. They provide startling information (and some parts read like a thriller) and at the end of the second part you might be able to make much more sense of what is happening with this world. Horrible sense.

Read it. It’s worth it.
It might be one of the most important reads you’ll ever have.

http://www.scribd.com/doc/9442970/Collateral-Damage-US-Covert-Operations-and-the-Terrorist-Attacks-on-September-11-200128062008

http://www.scribd.com/doc/9421535/Collateral-Damage-Part-2-The-Subprime-Crisis-and-the-Terrorist-Attacks-on-September-11-200126122008

newson May 3, 2009 at 9:18 pm

dick fox says:
“Neither can a currency maintain its value relative to a basket of goods because the basket by necessity is arbitrary. For over 2,500 years gold has proven its worth in determining the price of a currency, something that can be known.”

what? a price index is unsatisfactory because arbitrary, but one good (gold) is? where’s the lack of arbitrariness there?

the problem of separating the demand for money, and its supply, is that the first is totally unknowable and unquantifiable. money supply is known and quantifiable, allowing for disagreements about which aggregate most accurately defines “money”.

your approach is a dead-end. using gold as a marker has lead you to believe that the 1990′s greenspan was a deflationist. extraordinary!

Dick Fox May 4, 2009 at 7:10 am

DS.

Thanks for the reply. You showed me that I failed to mention an important element. The ABCT is in and of itself neither supply side nor demand side. Most real supply siders (not Kudlow and his ilk who only claim to be supply siders) do follow the ABCT but as Mises defined it, a change in the quality of the currency not the supply of the currency. Demand side Austrians follow the ABCT but focus on the supply of money not the quality.

Dick Fox May 4, 2009 at 7:30 am

newson,

You make two points that I should deal with.

First

a price index is unsatisfactory because arbitrary, but one good (gold) is? where’s the lack of arbitrariness there?

A basket of goods (price index) is dependent on someone deciding which goods and how many will be used to weight the basket or index. Even the most sophisticated econometrics can’t know this,

The price of gold, as Mises demonstrates in The Theory of Money and Credit can be known. Price is a specific exchange rate between gold and the currency, one oz of gold exchanges for x dollars. It is not a guess. The 2,500 year record proves the reliability of gold as a proxy for goods, gold is the most monetary commodity. Even a cursory look at gold history gives strong evidence of its reliability as a proxy because basic commodities still trade in the same ration with gold as they traded hundreds of years ago.

…money supply is known and quantifiable…

Here you make the all too common mistake of trusting in government statistics and propaganda. This is easily shown. What is the money supply? MZM, Mo, M1, M2, M3, something else? Tell me what the quantity was on last Friday? How about this morning at 8:00? How about at 11:00?

There is no way for you to know the quantity of money at any given point in time. How many dollars are held by foreign banks? How many by foreign individuals? What impact does the supply of euros have on the supply of dollars? How about government subsidies?

Trying to determine the supply of dollars will tie you into knots. Some believe that computers will make this easier to define but actually they make it more difficult becuase dollars can be shifted in a nano-second. The money supply cannot be known.

In summary the only known measure of a currency is its price, its exchange value with another commodity. The most monetary and stable commodity has proven to be gold.

I recommend you read (or reread) The Theory of Money and Credit with this in mind.

Dick Fox May 4, 2009 at 7:53 am

newson,

Just a follow up.

Take a look at Frank Shostak’s tortured attemt at defining money here.

http://mises.org/journals/qjae/pdf/qjae3_4_3.pdf

Shostak states in his conclusion : Contrary to mainstream thinking, we have shown that the money supply definition remains intact, notwithstanding the deregulation of financial markets and the introduction of electronic means of payments.

Shostak’s definition of money is:

Cash+demand deposits with commercial banks and thrift institutions+government
deposits with banks and the central bank

Tell me which of these can be known with any certainty?

Shostak spends 8 pages attempting to define money and comes out just as confused as he went in. If you cannot even define money supply how in the world can you quantify it?!

chris May 4, 2009 at 4:17 pm

Watch “Zeitgeist Addendum” and after about 60 minutes you’ll get the picture about MONEY, how it’s generated, who makes it, who prints it (and there is a huge difference), and who uses it to subjugate the world into serfdom.

newson May 5, 2009 at 11:03 am

to dick fox:
yes, i’ve read both the salerno and the shostak pieces on which money aggregate best reflects money supply. i’m torn between mzm (which stefan karlsson prefers) and the ams which is available in the stats section. nevertheless, in general terms these aggregates move in the same direction over the medium term.

the debate between the banking and the currency school hinged on defining money supply. although the instruments were far fewer in those days, the exercise is still worthwhile today.

again, defining money in terms of one good is arbitrary, why not silver, or copper, all of which have served monetary purposes? and especially now, as gold has not been the generally accepted means of exchange for over seventy years (even longer for other countries).

since gold’s totat demonetization by nixon, it has been anything but stable, just like any other commodity ($800 to 250 to 800 in the course of the last three decades)

i don’t place too much faith in price indices, common sense tells you whether prices are generally rising or falling (mises’ housewife example seems quite appropriate), but i do think the government’s monetary statistics are useful. i don’t find gold very useful as an inflation indicator, though in the past it has done well when inflation shows up in the cpi, rather than in asset markets in the eighties and nineties.

newson May 5, 2009 at 10:46 pm

dick fox says:
“Many Austrians define inflation in terms of the quantity of money rather than the quality.”

a money’s “quality” is uniquely determined by its quantity. gold is valuable precisely because it’s rare.

Randy R Cox January 21, 2010 at 10:09 am

I believe in free markets, but they are not free. Patents and copyrights may be good, but they are not free market. Requiring a doctor’s perscription may be good but it is not free market.

The trickle down theory that tax reductions for the wealthy leads to investment works only during times of near full production and onerous taxes.

It doesn’t make sense to belive there will be additional capital investment when inventories are full and production equipment is mostly idle.

http://www.earthimpressions.com/earthtalk/2010/01/trickle-down-economics-and-natural.html

Comments on this entry are closed.

Previous post:

Next post: