Pop quiz: what do you do when you are a politician who finds himself incapable of debating the merits of an opposing viewpoint? Answer: invent a viewpoint no one holds, critique that viewpoint, and claim intellectual victory.
That’s what happens when politicians talk about “trickle-down economics” – when in fact the truth is exactly the opposite of what liberals think it is.
Case in point: Then-candidate Barack Obama repeatedly featured “trickle-down” economic theory as a villain in several campaign ads during the 2008 campaign, insisting that “the old trickle-down theory has failed us.” Obama claimed the theory “says we should give more and more to those with the most and hope that prosperity trickles down to everyone else,” and has added the theory hinges on “just a few folks at the top doing well, hoping that it’s going to trickle down to working people.”
Obama’s attacks on trickle-down economics have continued for years, most recently with the President echoing Pope Francis’ condemnation of said trickle-down theory.
One small problem: Such a theory does not, nor ever has, existed.
As economist Thomas Sowell noted in his book Basic Economics, “’Trickle down’ has been a characterization and rejection of what somebody else supposedly believed.” But “no recognized economist of any school of thought has ever had any such theory or made any such proposal. It is a straw man. It cannot be found in even the most voluminous and learned histories of economic theories.”
Here the President and like-minded progressive statists employ an avoidance tactic to evade confronting the actual arguments presented by those who advocate for lower tax rates and less government interference as ways to grow the economy. Such advocates clearly do not make their case by seeking a transfer of existing wealth to high-income earners and business owners (i.e. “give more to those who have the most”). Rather, they emphasize the creation of additional wealth and jobs when entrepreneurs are not hampered by heavy regulation and discouraged by steep taxes, Sowell writes.
One can quibble with the merits of such an argument, but inventing a non-existing ‘trickle-down’ theory distracts from the issue at hand.
Indeed, even the imagination needed to conjure up the caricature of a ‘trickle-down’ theory exposes a fatal flaw in the economic reasoning of those inventing it. As Sowell wrote, “Economic processes work in the directly opposite way from that depicted by those who imagine that profits first benefit business owners and that benefits only belatedly trickle down to workers.”
As almost any entrepreneur – big or small – can tell you, when a business investment is made it is the workers who get paid first. Profits and capital gains only come later. For instance, when a new restaurant opens up, construction workers and interior designers get paid for building or renovating the space. Companies make money providing the furnishings and kitchen equipment. The wait staff, cooks and cleaning crew receive regular paychecks for doing their work. Furthermore, the food and beverage suppliers likewise get paid. Only later, if the restaurant is successful, do the owners see a return on their investment.
Even hugely successful corporations can often take years to break even. For instance, Amazon began in 1995 but didn’t turn its first profit until six years later after sustaining billions in losses. All that time, its workers and suppliers kept collecting checks.
As Sowell put it, “In short, the sequence of payments is directly opposite of what is assumed by those who talk about a ‘trickle down’ theory. The workers must be paid first and then the profits flow upward later – if at all.”
Such a woeful misunderstanding of the sequential process of business investment and job creation leads to confused thinking – even in the thinking behind the creation of a straw man. Such confusion leads progressives like Obama to lobby for progressive tax rates, which punish the prospect of future profits, thereby reducing current investments that create current jobs.
There is a real debate to be had over the best public policies to promote economic growth. Unfortunately, the President and many progressives aren’t interested in participating. Instead, they would rather slay the imaginary “trickle-down” dragon. Since their understanding of the economy is exactly backwards, we shouldn’t be surprised when liberal economics bring not prosperity but economic misery.
Lame.
All I have to say is supply side economics = trickle down.
Conservatives for decades have claimed the false virtue of giving tax and other benefits to the rich and powerful with the argument that they would put that money back into the economy and the little person would benefit. Just because some econ book doesn’t use the term trickle down theory, doesn’t invalidate what the conservatives have been pushing.
Let’s also remember that the God Father of Supply Side economics, David Stockman has since repudiated it.
Steve,
Thanks for proving my point.
Note sure what you read that proved your point.
If I knew that every new tax dollar not taken would be recycled into the economy in the form of investment or consumption, I would listen. But the reality is tax cuts given on unearned income by the mega wealthy 1% just go back into the onshore and offshore accounts with no economic benefit to be had.
Your cute scenario of a restaurant entrepreneur providing paychecks to dishwashers is not what the debate over economic inequality and “trickle down” is about. You do a disservice to your readers by pretending that it does.
Steve,
You proved my point by doubling down on attacking the strawman.
No one is talking about tax cuts for thieves (i.e. “unearned income.”)
Just keep slaying those strawmen.
I dare say that it is Thomas Sowell and all of you who are reprinting his canard that have created the straw man.
To say that there is no know economic theory of trickle down is like saying there is no Santa Claus and anyone who talks about Santa Claus is somehow not to be trusted. It is weird circular logic.
Here is what wikipedia says about trickle-down – “Trickle-down economics” and the “trickle-down theory” are terms in United States politics to refer to the idea that tax breaks or other economic benefits provided to businesses and upper income levels will benefit poorer members of society by improving the economy as a whole.[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.”[2] The term is mostly used ironically or as pejorative.” Note that it is not a theory but a political term.
Now lets revisit David Stockman: Today, “trickle-down economics” is most closely identified with the economic policies known as “Reaganomics” or laissez-faire. David Stockman, who as Reagan’s budget director championed these cuts at first but then became skeptical of them, told journalist William Greider that the “supply-side economics” is the trickle-down idea: “It’s kind of hard to sell ‘trickle down,’ so the supply-side formula was the only way to get a tax policy that was really ‘trickle down.’ Supply-side is ‘trickle-down’ theory.”
In the above note the use of the term trickle down to describe the supply-side school of macro economics.
I ask who is attacking a straw man?
Haha – it’s bad enough you resort to quoting Wikipedia, but you selectively ignore the parts that clearly undercut your argument.
Thomas Sowell claimed that, despite its political prominence, no trickle-down theory has ever existed among economists.[22] In response, many critics referred him to Stockman’s remarks to Greider. Sowell replied in his newspaper columns.[23] Stockman himself had not proposed or advocated the alleged theory, so Sowell rejected him as an example of someone who had done so. Additionally, Stockman had not specifically named anyone who, or quoted a source that, advocated the theory although he did claim that the theory was being adhered to by the Reagan administration. Sowell replied that Stockman “was not even among the first thousand people to make that claim” but that “not one of those who made the claim could provide a single quote from anybody who had advocated a ‘trickle-down theory.
Let me see if I can dumb this down for you.
1. Fact – We all agree that trickle-down is not an economic theory or school of thought or can be found in any august economic scholarly publication. (Its actually irrelevant if we agree or not on this).
2. Falsehood – To claim that Obama and others believe trickle-down is an economic theory is false. This where Sowell and you create the strawman. (Its actually irrelevant if Obama or anyone else thinks tricke-down is a theory – who cares?)
3. Fact – Tickle-down is a political term that goes way back in American politics to describes policies promoted by conservatives that economic benefit is stimulated by giving incentives to the wealthiest through tax breaks and other means.
4. Fact – The political term of trickle down is closely associated with the recognized macro economic school of through called Supply Side.
5. Fact – Supply side economics was the basis for massive tax cuts for the wealthy under the Reagan administration.
6. Fact – since the Reagan years, real wages for the lower and middle classes have stagnated, while the percentage of wealth owned by the 1% has sky rocketed.
Steve,
You’ve been dumbing it down since your first comment.
Anyway, your first two points are completely off-base. Obama and others DO believe it is a theory – as written in my article his 2008 campaign ad directly called it “trickle down theory.”
In number 3, you just re-confirm what I already wrote in the original article.
In number 4, you say the “term” is “closely associated with” an economic school of thought. So is the term “supply side” which you use. So what is the difference?
Bottom line: the whole point was to say that nobody advocating lower tax rates has actually believed it works because it “gives to the rich in hopes the benefits trickle down to the rest.” Rather, that has been a characterization of what many believe invented by opponents who want to debate against a theory they label as “trickle down” to avoid debating against the actual premises of tax rate reductions.
I’m afraid I don’t quite understand the difference between the truth of supply-side economics and the caricature you claim has been made by those on the left and titled “trickle down.” Could you elaborate on the practical differences between the two?
“They emphasize the creation of additional wealth and jobs when entrepreneurs are not hampered by heavy regulation and discouraged by steep taxes” sounds like what people on the left are describing when they attack the trickle-down straw man.
Hector,
Re-read the sentence immediately preceding the one you quoted.
“Such advocates clearly do not make their case by seeking a transfer of existing wealth to high-income earners and business owners (i.e. “give more to those who have the most”). ”
The basic difference is the transfer of existing wealth vs. the creation of new wealth.
I find it baffling that proponents of trickle down economics (Keynesianism) refer to reasonable rates of taxation like that found in Hong Kong and Singapore as “trickle down.” Then they are happy to trickle largesse down upon wasteful projects like Solyndras and stimulated monkeys so as to give us the slowest recovery in history — from a crises that was caused largely by monetary Keynesianism. (Nice to see Steve is still heckling for cronyism.)
Whatever the term, “trickle down” or “supply side,” both refer to the same basic premise that tax cuts and the elimination of unnecessary regulations and bureaucrats, aka smaller government, will lead to more business investment, more purchasing power in the hands of the consumer, aka, the little guy, and therefore more economic activity and the prosperous society that leads to. Somewhere some wiseacre once said, “a rising tide lifts all boats.”
This is in contrast to what is referred to as the Keynesian approach which asserts that an increase in government spending, Obama’s approach, is the best hope for producing greater economic activity, more jobs and more prosperity. The rising tide in this case comes from “global warming” but I digress.
The Obama administration has been at this for five years. When is all this growth, job creation and increasing prosperity going to occur?
The theoretical and philosophical arguments and banter here are entertaining but I think the article, as written, explains the basics of the supply side philosophy very well.
But there will always be those, so convinced that the wealthiest Americans are essentially “conniving, greedy, self aggrandizing, malcontents; leeches on the backs of the downtrodden poor,” who “hide” their “ill gotten gains” offshore. And there is always enough anecdotal evidence available to allow condemnation of any desired group, especially one with a target of envy on their back. The minority that is the wealthiest, American, business men and women are certainly no exception, especially those earning big fat salaries, stock options and bonuses while their organizations are downsizing to survive; a necessary consequence in a free market, capitalist system. Nobody is claiming it’s perfect, just the best so far devised, but one might ponder, “why is downsizing necessary now, in a Keynesian driven recovery?
The supply side, trickle down approach that lowers the tax and regulatory burdens on these “fat cats” will never sit well with those who advocate for equality of outcomes and the redistribution of wealth as the means to eradicate poverty. Those who consider themselves to be, at the forefront in intellectually based, economically advanced, socially tolerant, socially indiscriminate, nuanced sophisticates, have no problem discriminating against this group and others who hold opposing views. It’s a contentious world and this, just in: with Nature’s deepest apologies: It will never be perfect.
This article was pathetic in its stupidity. Trickle-down economics is just a derisive name for supply-side economics, which has been in every econ book I’ve ever had. It was heavily pushed by conservatives ever since Ronald Reagan (remember George Bush calling it “voodoo economics” in the primary?), and has succeeded in doing nothing but leading to the extreme wealth inequality that is dragging our economy down (the rich can’t get richer if all the people at the bottom they sell goods and services to can’t afford to buy those goods and services). By the idiotic logic of this “article”, Obamacare is a strawman argument, because there was never a law passed called Obamacare (I know most conservatives won’t know this, but it is actually the Affordable Care Act).
Jane,
If you actually read the article, you would know that the straw man is the characterization of the theory, not the name of it.
Jana,the biggest joke in your post is Affordable.Nothing affordable about that joke.We spent 700 million to one of Michelle Obamas college classmates to build the web site that doesn’t work.I have seen several internet professionals say it should not have cost more than one million.I sure every Econ book you ever read said Supply Side was a bad thing.That’s because the education system has been taken over by left wingers.I have been around long enough to see what happened with tax cuts.Under Kennedy business,employment,and taxes collected all boomed.Same thing happened under Reagan and George Bush.Liberals want you to believe taxes collected go down when taxes are cut.History shows us it is just the opposite.
To first quote you, “As almost any entrepreneur – big or small – can tell you, when a business investment is made it is the workers who get paid first. Profits and capital gains only come later. For instance, when a new restaurant opens up, construction workers and interior designers get paid for building or renovating the space. Companies make money providing the furnishings and kitchen equipment. The wait staff, cooks and cleaning crew receive regular paychecks for doing their work. Furthermore, the food and beverage suppliers likewise get paid. Only later, if the restaurant is successful, do the owners see a return on their investment.”
I must remind you that Donald Trump often did not pay those with whom he contracted, for work. Hundreds of small entrepreneurs have lost everything, from following his plans. I was peripherally involved in such an enterprise, and the company (which I owned a small part of) went broke when Donny ran out on his debts. When the main company goes broke, only the bottom level suffers. Supply side economics is based on a lack of greed, and that has never been a problem in the United States. If you could make Greed a capitol offense, then maybe you could give to the rich and benefit the poor. Otherwise, you benefit the rich.
In his spring 1982 State of the Union address, which I watched on TV as a college sophomore, President Ronald Reagan unveiled his plan to drastically cut the tax rate applied to the wealthiest members of American society because he believed, based on models created by free market economist Milton Friedman, that the benefits of the tax cut would ‘trickle down’ to all citizens via job creation and investment in new business infrastructures. I am pretty sure Reagan actually uttered the words ‘trickle down’ — which is why the media began calling this theory “Trickle Down Theory.”
George W. Bush’s 2003 tax cuts, which reduced the tax rate for the top 1% to HALF of it was after Reagan’s cuts, was a repeat of the application of Trickle Down Theory, which I would call “Trickle Down 2.0.”
It is disturbing and shameful that this article exists on the Internet, completely ignoring and distorting American history.
Diane the text of the speech is readily available on the internet. The words “tickle down” were never used. In the speech he talks over and over about lowering the tax burden on everyone, not just the top earners. That is the main difference between supply side economics vs trickle down. Supply side advocates lowering all taxes. Trickle down (a theory no one actually holds) advocates lowering taxes only at the top.
http://www.let.rug.nl/usa/presidents/ronald-wilson-reagan/state-of-the-union-1982.php
Reaganomics: record-setting economic expansion.
The deniers are liars.