It seems clear that Trickle Down Economics is back with new tax breaks for the rich, new spending on the security-industrial complex, and our first dip into deficit spending in years. While some call it it Voodo Economics, faith in Trickle Down Economics seems to be based upon the oft repeated line that anytime you put money into the economy, it benefits everybody. When pressed about rising executive salaries, believers embrace that too as eventually benefitting the economy.
I found myself in an argument about these matters recently, and had to take a moment to assemble my thoughts about it.
Trickle down economics is based on the belief that money is like energy, it can neither be created nor destroyed, only transferred. Government spending is supposedly the start of a great money chain that goes through large corporations and the rich before eventually ending with our lower classes. But these explanations ignore the fact that governments cannot spend money without raising taxes or incurring greater debt (which just delays and increases the eventual tax burden). The complete money chain begins not with government spending, but with taxes.
Since the burden of taxes falls largely on the poor and middle classes (the rich and large corporations often avoid paying taxes entirely — read more in the SF Chronicle and Reclaim Democracy), and the first beneficiaries of government spending are large corporations and the rich, the final result of trickle down economics is to greatly increase the gap between rich and poor.
It is fair to ask where all this money is going, though. Even though executive compensation is on the rise, average worker pay has been nearly stagnant (average executive salaries were 42 times greater than the average worker’s salary in 1980 and grew to 420 by 1998, salary growth was at almost 15% per year for executives but less than 3% per year for workers — read more at CFO.com, CEOs Win, Workers Lose, Third World Traveler). In the meantime, tax and welfare reforms resulted in a 10% reduction in the economic power of the bottom 40% of Americans. Clearly, many manufacturing jobs have left to country or have been lost to automation (the US lost 3 million manufacturing jobs between 1979 and 1992, before NAFTA! — visit SocialDemocrats.com for more). And the service jobs that remain pay poorly and mostly require unskilled labor. So, where indeed is the money going?
Finally, if trickle down economics really works, what’s so wrong with giving government handouts to the poor and middle class, certainly it would eventually benefit the rich?
Trickle Down Economics had its chance with Reagan in the 80s when our deficit ballooned to over a trillion dollars, unemployment rose to over 10%, and the number of homeless people rose to the highest rate in history (look here for more).