If I stay in the gutter long enough, I might get trickled on

May 2, 2003 10:32 AM

Trickle Down Economics.What with the neo-conservative movement in full swing behind Wolfowitz, the Bush administration is looking to take another cue from the Reagan years with the new tax cut for the rich. George H. Bush called it "voodoo economics". Does TDE or "supply side" economics actually work? Depends who you ask and how they take their statistics.
posted by destro (38 comments total)

Of course it works. The rich get richer, which is what it's designed for.
posted by fold_and_mutilate at 10:45 AM on May 2, 2003

Does TDE or "supply side" economics actually work?

JFK thought so.
posted by ZenMasterThis at 10:46 AM on May 2, 2003

That settles it, then.
posted by hackly_fracture at 10:58 AM on May 2, 2003

The L-Curve, which shows income distribution. This isn't about raw wealth, but about take-home.

Ouch.
posted by five fresh fish at 11:05 AM on May 2, 2003

That settles it, then.

No, but it is an additional data point.
posted by ZenMasterThis at 11:06 AM on May 2, 2003

JFK dropped the top tax bracket rate from 98% (which was put in place right after WWII) to 70%. Reagan on the other hand dropped it all the way down to 28%. A bit more drastic.

Things have also changed since JFK's time. Since global business is much more open and available these days, there's more chance that the rich wouldn't spend their money in the states, but would instead open up businesses in other countries.
posted by destro at 11:10 AM on May 2, 2003

There is not one instance in American history where supply side economics has worked. Not one.
posted by four panels at 11:14 AM on May 2, 2003

The L-Curve, which shows income distribution. This isn't about raw wealth, but about take-home.

He probably should have used a log scale for that plot...

Wasn't a big part of Reagan's argument for tax cuts related to the Laffer curve? Is anybody talking about the relationship between tax rate and tax revenue these days? What's the current conventional wisdom on Laffer?
posted by mr_roboto at 11:21 AM on May 2, 2003

First let me point out a couple things:

1. There is a difference between supply side economics and trickle down or "Voodoo" economics.

2. Any good economic policy is going to be a balance of multiple disciplines and types of economic theory. There is no absolute right or wrong answer, if there were there would not be much debate would there?

Yes cutting taxes can have a short term stimulating effect on the economy but this can only occur if the majority of the tax cut money is put into the hands of the majority of the population.

This is vastly different from the Reagan/GW Bush school of thought which is to try and place the majority of tax cut money in the hands of the wealthiest in the hopes that they will invest this money back into the economy. Unfortunately both history and common sense show that when the rich get more money the vast majority of it does not go back into the economy at large but instead is pooled into fewer and fewer hands effectively taking this money out of general circulation.

The problem I have with trickle down econ in practice (other than its failure to demonstrably achieve it's own stated goals) is that the companion theory is that it is ok to run huge budget deficits because the tax cuts will generate a better economy and more revenue down the line. Borrowing money is not really a good long term idea for the Federal government because just like a credit card there will be both principle and interest to pay in the future. This pay more tomorrow for what you need today is not wise day to day economic practice.
posted by aaronscool at 11:43 AM on May 2, 2003

This is vastly different from the Reagan/GW Bush school of thought which is to try and place the majority of tax cut money in the hands of the wealthiest in the hopes that they will invest this money back into the economy. Unfortunately both history and common sense show that when the rich get more money the vast majority of it does not go back into the economy at large but instead is pooled into fewer and fewer hands effectively taking this money out of general circulation.

My understanding is that the economic theory behind lowering the taxes of the wealthy is that they will, in fact, invest the majority of the money (they'll save it, rather than spend it). This will increase the supply of investment dollars, and drive down interest rates (banks don't just hoard the money in their accounts, they loan it out, at interest). Lower interest rates stimulate the economy by encouraging borrowing for investment in new businesses, expansions, new infrastructure, etc. Is that understanding anywhere close to how economists think?

Interest rates are already so low, though...
posted by mr_roboto at 12:03 PM on May 2, 2003

Well lets see, we reduce taxes for the rich, so they pay less.

We also increase the national debt to compensate for the lack of tax revenue. That means more interest payments... to the rich.

At the same time, the poor have all their community funding cut.

As a wise man once said (in a Mel Brooks movie...) "FUCK THE POOR!"
posted by zekinskia at 12:10 PM on May 2, 2003

This will increase the supply of investment dollars, and drive down interest rates (banks don't just hoard the money in their accounts, they loan it out, at interest). Lower interest rates stimulate the economy by encouraging borrowing for investment in new businesses, expansions, new infrastructure, etc. Is that understanding anywhere close to how economists think

This is the basic theory. But banks don't necessarily invest in companies or stocks exclusively they hold a broad portfolio that also includes government bonds, land etc. The problem though is that banks won't make risky investments which get money circulating (either through failure and loss or success and growth).

I know of no reputable economist who subscribes to the trickle down economics school of thought. Sure there are plenty of supply siders...
posted by aaronscool at 12:19 PM on May 2, 2003

"Unfortunately both history and common sense show that when the rich get more money the vast majority of it does not go back into the economy at large but instead is pooled into fewer and fewer hands effectively taking this money out of general circulation."

This is an absurd statement...do you think Bill Gates has a really big mattress that he is stuffing full of hundreds? The wealth of those at the top of the food chain is reinvested in the economy in traditional investments like government bonds, municipal bonds, and equities. It is also invested directly in financing new business. There is a reasonable arguement about who should be directing the investment of wealth in this country. Is it better to let a relatively few individuals direct the investment of the nations wealth, or better to spread the wealth more evenly over population and let the majority make investment decisions with their multitude of pocketbooks? I don't know the right answer, but it's probably moot. To get to choice two we would have to create a lot of legislation to aggressively redistribute the nation's wealth. That hasn't been a winning formula in politics for almost half a century.
posted by cyclopz at 12:25 PM on May 2, 2003

It would be better to have them spend the money rather than invest it. That way it will get spread into the economy quicker. If the idea is to get money to banks that will fund businesses, then the government could help the process more directly by lowering taxes on business investments.
posted by destro at 12:41 PM on May 2, 2003

"It would be better to have them spend the money rather than invest it."

Also absurd...should Bill buy 400,000 pairs of sneakers and a couple hundred SUVs. How he distributes his resources, whether through consumption or investment has no bearing on how quickly it returns to the economy.

Coincidentally, forcing consumption on the wealthy would produce the exact same result as equally distributing the wealth to the population at large. If you took $100 billion from investor X and spread it out as $1500 to each household, that $1500 would probably be invested in things like cars and refrigerators and new carpeting in the rec room. Would the masses be willing to invest in a company that's developing the cure for river bottom blindness or the company that just invented the widget that keeps your Starbuck's hot and plays MP3s at the same time? Risk and democracy are mutually exclusive.
posted by cyclopz at 1:21 PM on May 2, 2003

Risk and democracy are mutually exclusive.

Which planet were you on in the late 90s?

You're right about one thing, though: cutting the taxes of the middle class would result in an immediate boost in consumer spending. Increased consumer spending would better stimulate the economy than increased savings, since interest rates are already so low (just about everyone who's going to refinance their mortgage already has, don't you think?).
posted by mr_roboto at 1:31 PM on May 2, 2003

Why can't we just say screw economic liberty and pursue some of the plans of the socialists in congress by pushing further the income redictribution policies?
posted by ZupanGOD at 1:48 PM on May 2, 2003

What with the neo-conservative movement in full swing behind Wolfowitz, the Bush administration...

neo-conservative

neo:
- \Ne"o-\ [Gr. ? youthful, new. See New.] A prefix meaning new, recent, late;

new-conservative

Neo-conservatives are people who were liberals, but are now conservative. They are new to the conservative movement, hence neo.

Bush, Wolfowitz, Rumsfeld, & Cheney etc have always been conservative. People such as Irving Kristol and Daniel Bell are neo-conservative.

If you insist on labeling these people, Neo-Reaganite would be the correct term.

There seems to be an effort afoot by some people to make "neo-conservative" a slur, with some sinister meaning attached to it.
posted by Steve_at_Linnwood at 1:55 PM on May 2, 2003

Cyclopz: I would suggest you think about certain ideas before labeling them "absurd". I think we are agreeing to a certain extant more that you might care to admit.

First off Bill Gates's primary wealth can be found in the stock he owns in the company he founded. His wealth is not "stuffed in mattresses" nor is he really free to reinvest it in other places without serious consequences to the value of his equity. Most of Bill Gates's personal wealth is being redistributed via The Gates Foundation. To my knowledge Bill's investments outside of Microsoft and his Foundation are rather limited.

Also on the subject of Gates, Bill's father and potentially even Bill himself are very concerned about the "absurd" notion of wealth being pooled in too few hands as a result of tax cuts. He is an avid supporter of a fair estate tax and has spoken against most of Bush's tax cut proposals.

Finally if Bill were to buy 400,000 sneakers that money would make it into economy much faster than if he were to invest it in new businesses, enterprises or the stock market. Not that this is the right answer either...
posted by aaronscool at 1:58 PM on May 2, 2003

Good point...I'll just attribute the late 90's to some sort of mass hysteria...it was the exception to the rule. I didn't mean to imply that boosting consumer spending was a bad thing(and it may be what we really need right now), but a healthy economy needs a natural risk taking class to finance the growth that investment-by-committee never will. When fixed income rates of return are low, savings naturally flow to growth investments...that's a good thing for job creation.

As a side note...you'd be surprised how many outstanding mortgages could still be profitably refinanced.

and for aaron on preview...I only used Gates as an example....making the claim that the wealth of any specific individual is removed from circulation is absurd unless they are actually hoarding cash or precious metals in the basement. The wealth that is represented by Gate's ownership in MSFT stock was not taken out of the economy. It is newly created. Money flows through MSFT not into it. Consumers buy software...and the revenue earned by the company pays salaries and rent and pays for capital equipment. It doesn't just flow into some big mason jar in Bill's office. I don't care what his specific politics are...he is just the proxy for extreme wealth.
posted by cyclopz at 2:15 PM on May 2, 2003

"neo-conservative movement" could mean "new to the conservative movement" or "new conservative movement", but I guess I was reffering to the latter.

cyclopz: the late nineties wasn't the eighties. in fact, if you argue for the economic boom of the nineties, that was when tax rates were raised back up.

the large amount of investment going on then was probably due to people trying to hide income from the IRS.
posted by destro at 2:27 PM on May 2, 2003

Steve@L:

As destro points out neo-conservative is a term now used to describe the new kind of conservative that no longer seems to hold fiscal responsibility, smaller government and an isolationistic foreign policy as its core ideals.

The "new" Conservatives like Bush subscribe to the trickle down theory of economics, running deficits to support this, highly invasive and bully-ish foreign policies, and a bigger government.
posted by aaronscool at 3:13 PM on May 2, 2003

And Cyclopz with MSFT holding well over $40 billion in cash I'd say a great deal of their profit is sitting idle at the moment and certainly not part of "a natural risk taking class to finance the growth that investment-by-committee never will"
posted by aaronscool at 3:19 PM on May 2, 2003

aaron you are still missing the point...even that $40B is invested in something...short term securities or money market funds. It's funding something...it's not just stacked up in the corner somewhere. Would you argue that microsoft hasn't historically used it's excess cash to invest in other technology companies? And finally, although large corporate investors, like MSFT, and the hyperwealthy like Gates are part of that risk taking class, most of the real job creation comes from risk takers who are not in that top 1%.


and destro...all the following phrase tells me...

"the large amount of investment going on then was probably due to people trying to hide income from the IRS."

is that you have no idea what you're talking about...
posted by cyclopz at 5:20 PM on May 2, 2003

cyclopz I think it may be you who is missing the point. You can have all the investment in the world but without consumption what have you got?

Say what you will but investment in stable low yield low risk sectors like money markets or government bonds is not doing very much for the economy or job creation.
posted by aaronscool at 5:32 PM on May 2, 2003

Geez....you are doing an excellent job of twisting my words. I never said that investing in money markets or govt securities created jobs. I have said repeatedly that job creation comes from risk takers willing to invest directly in businesses. You said repeatedly that the wealthy somehow remove their assets from the economy. That is silly on it's face...and I have argued that it's not true. Those assets are doing something...funding the govt, providing short term financing for GM, helping somebody start the next microsoft, buying yachts...whatever. Consumption incentivises investment and investment can create consumption...we had no idea how useful a computer in the home would be until somebody had the bright idea of making one small enough and cheap enough and made a financial bet to make it happen.
posted by cyclopz at 5:47 PM on May 2, 2003

The dream of the next Microsoft is dead, Microsoft themselves will see to that.
posted by Space Coyote at 7:07 PM on May 2, 2003

I'm puzzled why we assume that the middle class would spend whatever they get from a tax cut. Perhaps I'm too influenced by my penny-pinching middle-class parents, but if I was in the midst of a recession and making $50k at a job that I could lose at any time, I wouldn't be buying a new car, house, or washer/dryer. I'd put it in my bank account and hope that the worst doesn't happen.
posted by gyc at 7:31 PM on May 2, 2003

using the word "incentivises" proves that you have no idea what you're talking about either and are only willing to use the straw man argument.
posted by destro at 7:47 PM on May 2, 2003

To the rescue!
posted by homunculus at 8:16 PM on May 2, 2003

There seems to be an effort afoot by some people to make "neo-conservative" a slur, with some sinister meaning attached to it.

Kinda like what's happened to the word "Liberal"?
posted by jpoulos at 8:20 PM on May 2, 2003

The only way to argue with these people is to speak their own language. Point out that the rich spend their money on luxury goods like Champagne and Mercedes-Benzes. And where do those come from? France and Germany, that's where! Tax cuts for the rich are therefore unpatriotic, if not actually treasonous.
posted by George_Spiggott at 11:59 PM on May 2, 2003

There are a couple of different ways money makes it into the hands of us "normal folk". You could go down to a store, buy all their merchandise, and that money would go to the owner of the store, who then pays the salary of those who work there. That's a pretty direct way.

You could, instead, invest money in a new company. Company gets money, creates jobs and pays employees, and they have cash in hand.

But that's not what generally happens when you're talking about hundreds of millions of dollars in personal wealth. They tend to invest their money in already existing corporations. Those corps want to increase the attractiveness of their stocks, so they have a couple of options. They could, say, invent something the world needs, or more likely, optimize the construction of an already existing product and decrease the cost of production. Say, by moving their factory jobs to a cheaper nation. This does not put money into the hands of "normal folk", it puts it into the hands of other countries.

They could also spend their money on luxury items, which as George_Spiggott pointed out, are not necessarily from this country, so that money isn't getting into our pockets, either.

Or, you can spend your money by buying another company to merge with your company. In practice, this leads to mass layoffs under the pseudonym of "maximizing efficiency and reducing redundancy" to offset the cost of ownership. This doesn't help out "normal folk", either.

There comes a point when increasing someone's income doesn't affect their overall spending. The fact is, there are only a few things that most people need to spend money on: food, house, car, maybe your child's education. Once you have those expenses covered, what's left is spent on luxury items, or goes into the bank. That money doesn't get distributed around. ideally, in our economic climate you want to give money to those people who are most likely to spend it, and on non-luxury items; specifically, those in the lower-to-middle income brackets.

I know there are about a dozen things I could use some extra cash for right now. Bills, debts, little electronic gadgets with pretty lights... If I made a million or two a year, I'd buy those things I wanted, paid off my debts, and what's left... well, I wouldn't have a need to spend it, would I? Sure, I could get a bigger house, or another car, but generally once my essential needs are met, the surplus isn't going to get spent. Giving cash to the rich without any caveats or instructions on how to spend it -- it's taking oxygen from the flame.
posted by Civil_Disobedient at 8:35 AM on May 3, 2003 [1 favorite has favorites]

"They tend to invest their money in already existing corporations"

Can you support this statement? Who funds new businesses? Three million new businesses are started in the US every year...give or take a couple hundred thousand.

The vast majority of these are very small like dry cleaners or newstands. Those small businesses are funded by personal savings, loans from friends and family, and local banks and credit unions...which reminds me...

"goes into the bank. That money doesn't get distributed around."

You and aaronscool seem to be operating under the assumption that money sits in big dusty piles in bank vaults. The simple model, which you seem to need, is that deposits come into the bank and go out as mortgages, or loans, or are otherwise invested.

The businesses that don't fall into that small category are funded in lots of different ways. Some of them are financed by strategically interested corporate investors like a small company that develops a new widget for your car dashboard being supported by Ford...some are financed by the government like the companies that are funded by DARPA and its like...some are financed by wealthy individuals either directly or through VCs or angel funds.

"Giving cash to the rich without any caveats or instructions"

Good thinking...lets make sure we tell all those folks who have more money than us how to spend it.
posted by cyclopz at 6:09 AM on May 4, 2003

Venture capital investment has all but dried up in the last couple of years in favour of investment in established corporations. And every worker with a 401k also helps to strengthen the established corporations' positions, in return for some small return on their investment.

So yes, the deck is very much stacked against those who would try and horn in on the big business racket.
posted by Space Coyote at 1:00 PM on May 4, 2003

Care to explain this statement?

And every worker with a 401k also helps to strengthen the established corporations' positions, in return for some small return on their investment

Not all, but most 401k plans are administered by a funds management group and provide a variety of investment choices from cash proxies to small cap stock funds. How this strengthens the "established corporations positions," I don't understand...unless you want to allow 401k investments in startup companies.

And though the pure VCs have pulled way back on their investing, individual angel investors, strategic venture investors and the captive venture cap businesses in the banks have been taking advantage lower valuations to scoop up bargains were they can find them.
posted by cyclopz at 6:40 PM on May 4, 2003

cyclopz I appreciate your representation for the traditional supply side economics. I think there is merit in making sure capital channels remain relatively unclogged either by government or by too few investors with too much. Now when people make conservative investments such as in bonds, money market accounts, bank accounts or other FDIC insured accounts or even blue chip stocks the capital is not moving either very fast or very freely.

Yes millions of businesses are started every year and millions of businesses fail as well. Both sides of this equation are vital for our economy as it is now. Capital must flow from consumer to business owner to investor and back again. This is most certainly (as you would like to try and paint it) NOT a top down system or top up for that matter. As much as you might like to play the chicken and egg game the answer is it doesn't matter which came first as long as the cycle continues. This is the flaw in the extremes of supply side theory. If too much capital is allowed to stay with the rich then too much money will start to go into areas that do nothing (or very little) for the economy. It also starts to allow for fewer and fewer people to have a bigger and bigger impact on the economy as a whole.

You talk a lot about investment in new businesses and startups. I certainly think this is one of the most vital areas of our economy but I doubt very highly that many companies or individuals invest the majority of their wealth in this area. New businesses, VC are probably the riskiest investment you can make (granted, with some of the greatest rewards) and any good investor or company would want to balance their portfolio (if they are investing in new business at all).

I hope you are not suggesting that so called Reaganomics or Trickle Down Economics is a system that works to the benefit of the economy at large.
posted by aaronscool at 8:32 PM on May 4, 2003

Aaron...go back and carefully read my posts. I don't think you'll find explicit advocacy of either supply-side or trickle-down economics anywhere in those posts. I agree that wealth inequality taken to extreme would be destructive to the social fabric in the US, but what you will find in my posts is the belief that redistribution in the extreme will smother investment in innovation. In fact, the only reason I posted at all was your statement arguing that money in the hands of the wealthy was effectively removed from circulation. This is just not true. I think I could argue that the savings of 10,000 middle class savers has less impact on the economy than the savings of a single $100 million rich guy, but I can't prove the argument and we'd be typing back and forth about it all day.

"I doubt very highly that many companies or individuals invest the majority of their wealth in this area."

I never said they did...a typical strategic or individual angel investor might have anywhere from 1-10% of their investment portfolio in true startup capital. If not for those individual angel investors, the financing for innovation would come only from banks and corporate investors. I'd argue that that is a bad thing.

"It also starts to allow for fewer and fewer people to have a bigger and bigger impact on the economy as a whole. "

Finally we have something to agree on...the above statement is true and I think it's an unhealthy byproduct of wealth concentration. The economy benefits from a diversity of ideas and risk evaluations.
posted by cyclopz at 6:15 AM on May 5, 2003