Could any economists point out a good site with a nice point/counterpoint debate on trickle-down economics?

November 6, 2004 4:40 PM

Like a good progressive, I always assumed Reaganomics/Trickle-Down economics was just a load of nonsense. However, like a good intellectual, I realized I had nothing to really back my opinion up with and should research further. Any economists like to chime in or link me to a good site with a nice point/counterpoint debate on trickle-down economics?
posted by Slimemonster to work & money (23 comments total)

Well, here's a little plateau to ponder. Find out sometime what it takes to start a business. Some kinds need very little up front cash. You just sell your services or whatever. But how much do you think it takes to open up a restaurant with 20 tables? An office with 10 employees? The answer is: kind of a lot. I think running ones own business is really attractive, but haven't ever taken the risk because I don't have that many parcels of $25K to throw around. Now, we all know that 50% of restaurants fail, etc. There are major risks in starting a new business, of any size or kind. People who take that extraordinary risk create jobs, products, services, the things we all depend on. Some feel that since the rich generally capitalize business, we should be friendly to the rich. And because the poor generally just consume, they don't generate much growth in the economy. I'm not sure what I think of all this, but I have had moments where I've thought - "shit, if that guy over there wants to risk all his savings on a new record store, good luck to him, and he deserves to reap extraordinary rewards if he succeeds."

I'd love to be talked out of this line of thinking, as I feel it supports the broad strokes of supply-side econ. Someone help me.
posted by scarabic at 5:00 PM on November 6, 2004

The foremost supply-sider.

Austrian Economics is also a "trickle-down" economic theory, but it espouses far different views about central banking than does the supply-side school.

The monetarist Chicago School isn't a strict supply-side movement either, but it is a trickle-down philosophy. Hoover is Chicago's outpost.

You may also enjoy this quiz.
posted by trharlan at 5:22 PM on November 6, 2004

new business ventures:
One of the consequences of Black Thursday was the passage of the Glass-Stegall act. The act prevented banks from owning stock brokerages in order to reduce the likelyhood of a second crash. As a result venture capital lending turned into a job for high-net-worth individuals. Government defense spending from the '40s to '70s reduced the need for private risk-capital. By the '80s it was clear that venture capital lending was a legitimate and vital business. In 1999, the Glass-Steagall act was repealed, paving the way for a more professional approach to VC activities.

rich people:
Getting back to the original question, if there is no inflation people who have excess capital are unlikely to do anything with it unless they are unusually greedy. Since we've moved away from the gold standard it is not very safe to keep your capital in a large cash account. So people who accumulate lots of capital have little choice but to invest it back into productive enterprise, either via stock shares or bonds.

economics - a joke science:
One thing few economists will tell you is that economics is very far from a "true" science. There are plenty of hypotheses but almost no experiments. Most "experimental" economics involves large spreadsheets and computer simulation.
posted by b1tr0t at 8:21 PM on November 6, 2004

Yes, tax cuts for rich people will stimulate the economy, in the obvious way. The question is whether the effect is large enough to be worth the cost of budget deficits and increased inequality. Or even large enough to be noticable on a large scale.

Wikipedia has a nice summary, with lots of links at the bottom.

Nouriel Roubini adds up a bunch of numbers, from 1997.

Paul Krugman, on why the supply-side idea is popular, and wrong.

Supply-side Jesus doesn't offer much in the way of economic theory, but can hardly be left out.
posted by sfenders at 9:48 PM on November 6, 2004

b1tr0t, behavioral and experimental economics are growing subtopics in the field. and the fact economics has the uncomfortable position of being the bastard (and dismal) field straddling social science methodology (use field data analysis and number crunching) and hard science is well known and often the source of silly in-field jokes and academic conferences. and if you think absence of lab experiments for every study indicates economic studies are a joke or lacking, i'd be interested to know if you find the same true for soft/social science findings that nevertheless have definitive methodologies (anthropology, public policy studies, or anything where carefully presented field work is key).
posted by ifjuly at 10:05 PM on November 6, 2004

The Laffer Curve
vs.

posted by LimePi at 12:02 AM on November 7, 2004

I am not an economist, but I have studied economic history (1500 ad to 1900 ad).

Capitalism has a natural tendancy to increase disparity, without social/political restraint. The market is volatile, and those who are slightly larger, whether a business or a farm, are better able to ride out the ups and downs - the smaller are more likely to go out of bussiness. An example given to me was in the form of a small farmer and a large farmer (of grain). In years of large harvests, the small farmer has a lot to sell, but prices are low, and so he does not make more than he would in an average year; he must sell, because he needs that money to live on, buy other things, etc. A large farmer, however, will have enough to sell at the low price, but also enought to hold by for a time when prices are higher; if he has cash reserves, he may not sell any. In a bad year, there are high prices, but the small farmer has much less to sell, and may not make any more, while the large farmer may have some surplus, or even crops saved from previous harvests.
There are small businesses or farms that succeed, of course, but the trend over the last 500 years has been for amalgamation, first in land, then in business.

To continue the farming example, I know that in places like Britain, where land is scarce, the large farmers (landlords mostly) proceeded to buy up most of the land of the country, and more and more of the population because landless wage-labourers - which put them in an even more precarious position with regards to the market, as they could not even feed themselves when times were bad.

The disparity within Britain increased between the sixteenth and the early nineteenth centuries; after that, disparity within Britain began to decrease, but disparity within the British economic system (the empire) increased. Even as Britain was becoming more equal, it did so by relying on products imported at low cost from the colonies, including grain from India when it was suffering from major famines during the 1870s-90s.

There are ambiguities - one might think that the markey pressure would be to lower wages, to increase profits. But Ford, for instance, realised that he could make more money making cars by paying his workers enough that they could be his customers as well. Thus he paid them $5 a day, rather than $2; it was an economic model that obviously worked, and continues to work for companies like Ford. However, in other industries, the pressures have been to lower wages, to be "more competitive". Disparity has increased in the western world since 1980, under Reagan and other leaders who shared his economic beliefs.

The way I see it is this: Adam Smith was right, there is an "invisible hand" - that is, the market does act like some great organism, responding to stimuli, etc. But it's not working for us - the pressure from the market is to produce more, cheaper, faster. But is that really the best thing for society? The market doesn't work to raise quality of life for the majority (which include time off, community, and all sorts of non-tangible things as well as simple consumables). It doesn't even seem to have an interest in making sure that everyone gets richer, because remember, the economy is now bigger than the western world (itself getting more divided) - it includes the developing world. How would the growth of wealth over the 20th century look when averaged over the integrated markets of the developed and developing worlds? Also, you wouldn't want to measure wealth by simply currency, which goes up and down at a whim, but by tangibles like food, shelter, clothing. I hope I am being too pessimistic, and we can actually begin to lift everyone up - but it's not happened yet. We just shift the poverty around, look for profit to skim off someone else's labour or land.

The point is - do we want to live for the market, or do we want the market to work for us? If it's the latter, then we should realise when we have to restrict the market. That's certainly not easy - and restrictions to benefit one group (eg tariffs) can hurt another (producers elsewhere). But it doesn't mean that the answer if just to abrogate responsibility altogether.

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rogerd - I will answer your conumdrum. I think basically, it's predicated on this false assumption:

" the poor generally just consume, they don't generate much growth in the economy."

Now, this is a myth I've heard before. But the truth is that the growth of the entire economy is predicated on the labour of those people. Because someone else had the money to begin with, they get to skim profit off the top of the labour; and they are the ones who are said to create the growth.

A business owner may invest in the equiptment and materials, and take some of the risk in case the business fails, but the business is nothing without employees to make your widgets or serve your pancakes. Those employees are just as much at risk - anyone who has been laid off from a badly run business can tell you that. They live their life paycheck to paycheck - and after losing the job, may not find another. But at the same time, they don't necessarily share in the added benefit if the business succeeds. It would be nice if all employees received stock or at least raises when their hard work helps the business, but the reality is that millions get minimum wage, and will get minimum wage their whole lives, even as they work to make profit for someone else.

I have a great deal of respect for the true small business person, who has invested their own money they earned and invariably also work their butt off in the shop/restaurant/factory as well. But the truth is that the vast majority of investment in the world is based on inherited wealth, profits from the exploitation of natural resources (who do they really belong to?), underpayed labour, etc. The socially mobile are a larger group than they were in the past, but they are still a minority. So those who have to begin with, invest what they have, and get more, while those who do not have, work for what they need to get by, and die. But their work is the backbone of the whole system, just as their consumption drives it.

This might sound slightly marxist. But the truth is that I have never read Marx - I decided in highschool that his historical teleology was too whacked. These opinions have been arrived at through graduate study of economy and social structure (particularly in England, but also read about for elsewhere) between c. 1500 and 1900. I have wished that someone would take Marx and subject him to rigourous historical study, because I think that he may have been a bad historian, but was an astute observer of what was happening around him. What he had yet to see was the consumer revolution, where workers begin to be paid enough that they can start partaking of the growth of the industrial revolution. However, I have become recently aware that this is at the same time as the colonial possessions began to see a decline in living conditions. I need to know more about this.

Interestingly, conditions were improving in Britain, but nutrition for the poor, for instance, was still a fraction of what it had been in 1700. They had more things (furniture, clothing, knick knacks), but less food, and less nutritious food. This is a puzzle to be worked on. Culture? The cost of food staying high while other costs drop? I wonder if this is the trend for modern poverty. The poor get more stuff and doodads (which are cheap), but still struggle to pay rent and buy nutritious food.
posted by jb at 2:35 AM on November 7, 2004

I know I just posted a gargantuan post - but just a question about tax cuts:

How would a tax cut stimulate the economy more than the equivalent government spending? I've always wondered, since a tax cut to someone rich could be spent domestically, or it could be banked off-shore, or spent internationally. But a welfare check is always going to be spent domestically - grocery store or beer store, it doesn't matter. And every single cent will be spent, none sent overseas or banked. I've actually heard that tax cuts can be a good way to slow down an overheated economy, because they won't be all invested back into the economy the way government spending is. Governments don't have saving accounts, do they?
posted by jb at 2:42 AM on November 7, 2004

People have given a lot of interesting and good information here, but I think the basic truth has yet to be put succinctly:

Supply-side theory tells us that when you make cuts in the top tax brackets (or capital gains, or whatever), the resulting spending and/or investment will offset the resulting revenue loss, and maybe even increase revenues.

We tried this with Reagan, and now with Bush. It didn't work. In fact, it left us with a mountain of debt that we in the US have yet to get out from under.

Here's my opinion as to why it didn't work and won't: a 2% (for example) decrease in taxes among the wealthiest people is not enough to unleash a whole bunch of new investment. And it sure won't result in much added spending--these are people who already had plenty of money to spend.

If the top marginal rate was 90% and we cut it to 50%, there might be a case for this sort of thinking. But it seems to me that given the current situation, it would be better to cut payroll taxes and unleash a small increase in spending among millions of people.

In any case, the small business owner (like me) that scarabic posits would be unlikely to be helped by this sort of tax cut. A better idea would be to find a way to reduce the huge cost of health care for employees and the employer contribution to Social Security.

On preview: with regard to the "poor just consume" bit--consumption is the foundation of the economy. Of course the poor don't invest--that's sort of part of being poor, isn't it? If you make a product, you'd better be damn sure that someone is buying it--thus, consumption.
posted by lackutrol at 3:00 AM on November 7, 2004

lackutrol: We tried this with Reagan, and now with Bush. It didn't work. In fact, it left us with a mountain of debt that we in the US have yet to get out from under.

Well, no. The Reagan and Bush tax cuts were stimulative, and provided mre government revenue than would be predicted by a static model. The mountain of debt resulted from spending.
posted by trharlan at 1:17 PM on November 7, 2004

Were the tax cuts stimulative, or was it the global trade cycle moving up and down the way it has for the last 100+ years?

I had a professor who was once trying to explain how a Zimbabwean chief (king?) could be made or broken on his ability to bring rain - not an easy thing for a classroom of North American, climatically aware students to understand. We knew that the chief had not control over rain - that was subject to natural forces and trends. But he said, it's just like voting for a government on the grounds they can change the economy. People get in, the economy goes up, they get the legitimacy - whether they had anything to do with it or not.
posted by jb at 2:42 PM on November 7, 2004

jb-- you don't think that tax cuts are stimulative? I don't even think Dale Jorgenson would claim that. Reasonable people can argue about the degree of stimulus provided by tax cuts, but to deny it outright (which is counterintuitive, to be charitable) seems to be a strange position to hold.
posted by trharlan at 4:20 PM on November 7, 2004

The basic problem with supply side economics is that rich people save money, while poor people spend it. Those statements are true by definition: a rich person is one that has accumulated wealth (i.e. unspent capitol) while a poor person is one that has insufficient capitol to either meet basic or build a reserve.

Money given to the rich (in the form of tax reductions) may be either spent or accumulated as wealth. Money given to a poor person must be spent, because they have unmet needs.

Because of this, money given to the poor is guaranteed to increase economic activity, while no such guarantee is available when giving money to the rich.
posted by NortonDC at 7:35 PM on November 7, 2004

"basic needs or"
posted by NortonDC at 7:42 PM on November 7, 2004

The basic problem with supply side economics is that rich people save money, while poor people spend it.

Nah. Rich people give money to their banker or to their broker, who spends it for them. They spend it on different things, though, and the velocity is probably much different. Investing in the stock market in particular is probably a pretty slow way to get money circulating widely, since what you're basically doing is just giving your money to another rich guy in exchange for some of his stock, and he's going to turn around and do the same with his proceeds, and so on. The money only gradually gets out into the economy at large.

What is needed is extra incentive to invest in new ventures rather than just trading shares of existing ones. A tax break here might really do some good.
posted by kindall at 8:13 PM on November 7, 2004

tharlan - I have yet to see it demonstarted empirically. Since I can empirically disprove other assertions of contemporary economics with historical fact (such as trickle down theory), you must forgive me for being skeptical on this as well. Especially since, as NortonDC points out, it does not even follow simple logic; I find the suggestion that tax cuts stimulate the economy more than government spending to be counter-intuitive (for the reasons NortonDC stated). I have been told by people who know that, in fact, tax cuts are a good way to slow down an overheated economy.

The global economy has been experiencing a trade cycle for over 100 years; any understanding of the effect of government actions on the economy must take these factors into account. I am not a modern historian, and so my knowledge of the twentieth century is not strong (having been born in 1977). But the first question I would ask is whether countries with tax cuts had been compared to those without at the same time, to see how it might be acting as a factor. I know that Ontario came out of a recession at about the same time as the government there granted tax cuts; however, so did the entire United States and most of the world. Ontario is a terrific place, but somehow I doubt that tax cuts within a prvince of just over 10 million people could affect the world economy that much, and, indeed, makes me question the causal relationship between tax cuts and growth in Ontario.
posted by jb at 8:14 PM on November 7, 2004

(sorry - the Ontario example was from the mid 1990s; did Clinton grant tax cuts about that time?)
posted by jb at 8:16 PM on November 7, 2004

me - The basic problem with supply side economics is that rich people save money, while poor people spend it.

kindall - Nah.

Yeah. The original statement is necessarily factually accurate. Your "refutation" is not.

Rich people are the people that have saved income, creating wealth. Poor people are people who have not saved income, resulting in a lack of wealth.

jb - I find the suggestion that tax cuts stimulate the economy more than government spending to be counter-intuitive (for the reasons NortonDC stated)

I spoke of tax cuts as an example of government policy that may be used to direct resources to the rich or the poor. I made no comparison between government spending and tax cuts as means of implementing such a policy.
posted by NortonDC at 9:17 PM on November 7, 2004

The original statement is necessarily factually accurate. Your "refutation" is not.

Well, if I was trying to refute anything, I guess I failed!
posted by kindall at 10:52 PM on November 7, 2004

NortonDC: As I have always been told, the theory behind the premise that tax cuts stimulate the economy is that the well to do people who receive those cuts will spend or invest that money, thus stimulating the economy. You pointed out that the rich are less likely to spend all of their money than the poor. kindall rightly points out that much of the money of the rich is "spent" in a way, by investing with banks or brokers, but also that this money takes longer to circulate and thus stimulate the economy. I'm sorry if I appeared to put words into your mouth; I thought you were also discussing the issue of tax cuts and economy stimulation, and thought it was silly to repeat your points when they so nicely illustrated the point I was making, that is, the reason I am skeptical.

On another point, I don't understand what you mean by

"Rich people are the people that have saved income, creating wealth. Poor people are people who have not saved income, resulting in a lack of wealth."

What do you mean by wealth here? I am not an economist, just a simple history student, but in my world wealth means stuff, value, etc. Working people are the creators of that wealth, when they grow, manufacture or serve. Rich people are the beneficiaries of that wealth creation, which is how they got rich to begin with. Many don't create anything, but use the existing power structures to accumulate more stuff to themselves. It's been that way since the beginning of time; rich owners and managers no more create wealth than feudal lords made grain pop out of the ground. They are just more gentile about taking their cut these days.

As for saving money, that is true. Of course, one could say that no more saving effort is made (a great deal less, for all but strange eccentrics who live off their millions in cramped apartments), because they simply have so much more to begin with. It's like running a car race where some begin ahead and given much more fuel at every pit stop. Even if they are less careful with it, they will still run faster and longer.
posted by jb at 11:22 PM on November 7, 2004

...and some people have jobs that bring in a lot more money than they need, so the degree of discipline and self-denial necessary to 'save' may be less.
posted by bingo at 11:33 PM on November 7, 2004

jb, I'm speaking of wealth as distinct from income. Many people assume that wealth is the result of a high income, but a high income does not guarantee wealth. Wealth is produced when income exceeds expenditures. Two people with identical incomes may have vastly different levels of wealth due to their spending habits.
posted by NortonDC at 1:17 PM on November 8, 2004

Oh, I thought when you said "creating wealth" you meant wealth in the larger societal system. Probably I was getting confused because of Gregory King's 1688 survey of England, which divided people (aka rich people) who made the kingdom richer because they were rich, and the people who made the kingdom poorer because they were poor. (Yes, his logic was silly, but economics or sociology weren't exactly well developed in 1688).

Now it makes much more sense, thank you.
posted by jb at 8:26 PM on November 9, 2004