by Henry Oliner
‘Trickle down’ is the phrase used to marginalize supply side economics. Users think it foolish to think that any tax cuts for the wealthier payers will benefit others downstream.
Yet tax cuts for the middle class do not trickle down? Or do they not trickle elsewhere? If 20 people making $50,000 get a 5% tax cut, is there any less trickle down than two people making $500,000?
The assumption is that the lower paid will spend the money and the wealthier will save it. Let’s assume that is true. What will they spend it on, and who precisely do they think will sell them the goods they buy, and who will benefit from the new higher demand for consumer goods?
Let’s suppose the middle class will increase their 401k contribution by a few percentage points. Who benefits then?
When the wealthier save their tax cut, where do they put it? In banks, stocks, new businesses? Do they not think the wealthy will spend more or donate more? Is consumer spending by wealthier any less of a trickle down than consumer spending by the middle class? Is savings and investing a worthless use of money? Then why do we encourage the middle class to invest in 401ks with tax incentives?
When Obama increased taxes, what do we think he did with the increased revenue? Did we expect it to trickle down to others? Did they not expect the increased deficit spending to stimulate consumer demand? Nancy Pelosi in her second most stupid comment contended that increased unemployment benefits would stimulate the economy because the poor people were more likely to spend it. By her logic, the greater our welfare benefits the stronger our economy would be. For the record, her most stupid comment was the classic, “we have to pass the (ACA) bill so we can see what is in it,” though it is a close call.
The ‘demand only’ school of economics infers that we can tax and spend our way to prosperity. We cannot. Wealth is created by new ideas, risk- which includes failure, and efforts to increase productivity.
Spending as a stimulus depends greatly on what it is spent on. Infrastructure spending during the New Deal is still with us, providing value 80 years later. Spending on capital equipment benefits us all more than spending on consumable, but an economy requires both to function.
Money trickles down, flows up, and spreads in every direction. Consumer demand drives investments to lower costs, and new products rise and fall based on consumer votes. Steve Jobs was noted for not wasting time on consumer surveys. Frank Zappa did not compose his music for a consumer market.
The economy is ever changing and far too dynamic for any central planner to control. Critics who cry ‘trickle down’ cannot comprehend this. They are stuck in a narrative of wealth and oppression and a class struggle while they exchange texts on their latest iPhone and sip $6 lattes at Starbucks.
‘Trickle down’ is meaningless and ignorant and does not withstand minimal scrutiny. It hides the greater issues of the size, scope, and expense of government; and whether consumers and investors can allocate resources better than bureaucrats.
Wealth serves us best when it converges with both power and knowledge. That is the true function of markets.