18 Jul 2017

Trickle down economics just doesn't work

I wrote this on reddit, but it's worth repeating:

The premise of "trickle down" is that wealth for the rich will result in (some) wealth for the poor. More important, it assumes that the government should get involved by making the rich richer. (This is why the term is considered derogatory.)

So... how do the rich get richer?
(1a) The government gives them wealth ("rents") via a contract, corrupion, or other "neoliberal" policy (I hate that term as often confuses markets and politics); or
(1b) They make themselves rich.

For (1a), see "cheap oil royalties", patent trolls, defense contractors et al. For (1b), see "Bill Gates"

Now, how can it "trickle down"?
(2a) The government taxes the wealth and transfers the $ to the poor. That's kinda counter productive for (1a) (why not just give the royalties to the poor?), but makes sense with 1b.
(2b) The poor somehow benefit from rich people being richer (see Fable of the Bees).

Both of these make no real sense compared to the real source of prosperity for the masses, i.e.,
(3a) Cheap access to education and health care
(3b) Competitive markets (reducing rents)
(3c) Taxes on wealth that pay for (3a)

So, next time you hear ANYONE say "trickle down" just walk away. It's bullshit. A government that wants efficiency and equity will do 3a-c, which is compatible with basic income, carbon taxes, property taxes, etc., btw...


David Patrick Green said...

What you say rings true & does not sound like rocket science. Funny then that one seldom hears anything like that from an elected official. (In the U.S., anyway)

Come back to the U.S. so that we can run you for office!!

David Zetland said...

Sorry, America is too great for the likes o me.

DB said...

I most often hear the term used to derogitotily refer to selecting pro-market policies over redistributional policies. I would imagine most everyone would agree with you that granting rents to the wealthy is a pretty terrible policy. But at the very least, many people confuse that with classical liberal hesitatancy to avoid choosing winners and losers as a matter of redistributional policy, and quite often I feel the term is used as an intentionally misleading ad hominem.

I suppose the moral, as it often is, is to clearly define one's terms. Does consciously giving unearned rents to the wealth really need to be explained as bad?

David Zetland said...

Good points. I put the rents dimension in bc many trickle down policies (called that by their opponents) do that.

Tom said...

David, I've never heard "trickle down economics" refer to (1a) grant contracts, rents, etc directly to rich people or business. Even when cutting regulation, or trying to make markets more competitive, right-leaning politicians do not refer to that as "trickle down".

The phrase came about with regard to cutting taxes for the rich. That rich people invest their excess money in the stockmarket, or their business, and this ends up creating more jobs and wealth for the poor than if the government taxed it and spent it.

I don't believe, as Republicans have argued, that reducing taxes for the rich will magically lead to so much more economic activity that the tax cuts "will pay for themselves". There's plenty of evidence in the US since the 80s to show that the correlation is not there.

But it seems like a reasonable argument, especially when the top marginal rates were at 70%, to say that there is a limit to how much more benefit can be gained from raising taxes on the rich. First, there is more incentive to dodge taxes seen as unfairly high, or to even reduce work hours and incoming if you can't enjoy the benefit of additional earnings. Second, once you have an adequate level of 3(a), letting rich people invest their excess money in the economy helps everyone in the most efficient manner possible, rather than taxing and spending it. Assuming you want to be somewhat fair to rich and poor alike.

We already have a progressive tax system, and we have a social safety net. The question is about balance. I don't hear a lot from the left about how to improve the provision and effectiveness of government services; only about how everyone relies on them now, so we have to decide who will pay. Unfortunately, it really seems impossible to rollback a new gov't benefit or service if that mode of delivering them hasn't worked well.

Tom said...

Oops, forgot a link (which, uh, I didn't read):

David Zetland said...

Tom... at your link it says "Any policy can be considered “trickle-down” if the following are true: first, a principle mechanism of the policy disproportionately benefits wealthy businesses and/or individuals in the short run. Second, the policy is designed to boost standards of living for all individuals in the long run."

The trouble with this favoritism towards the rich (not the same as supply side) is that (1) the rich are fine enough already and (2) the elasticity of spending by the rich (aka fable of the bees) is too low to really really help the poor.

I agree that high marginal taxes lead to dodging, which is why supply side worked in the Reagan tax reforms, which ALSO closed loopholes

Overall, I'm for no corporate tax and property rather than income taxes, as the means of raising revenue, then spending that on broad programs (rule of law, health and education)

The US does have a progressive tax system and safety net but both are deficient compared to the Netherlands, imo. That said, the federal govt in the US needs to be smaller to give states more leeway while the Dutch are better with centralization.

It's complicated ;)

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