Tuesday, September 21, 2010

Trickle Down Economics: The Great Lie


So in light of the expiring Bush tax cuts, the Republicans are back at it again with the “trickle down” theory of economics. If you’re an advocate for big business and the rich, well it’s a pretty good theory, but does it really work for the poor man at the bottom? Take a look at the graph above, courtesy of the Congressional Budget Office. It looks to me like even as the rich get richer, everyone else is still waiting on the promised "trickle down". Now, let's use just a little logic and common sense to formally deconstruct this great Republican economic myth.

Overall, the Bush tax cuts are estimated to have cost our government $1.3 trillion. Admittedly not all of this cost is on the tax cuts to the wealthy, but they got enough of it, for us to ask, what have they done with their extra money? The Republicans would have you believe that they have used this money to invest in our economy and create jobs in America. If they did, I must say I haven’t noticed. However, when checking US Census Bureau, there is some shocking data, that might explain where this money has really gone. Between 2000 and 2008, the investment abroad has grown from $1.3 trillion to $3.1 trillion. That means that the rich have spent their Bush tax cuts; everywhere but in America. That stream is trickling down not to the poor, but instead to other countries around the world.

What could be wrong with the Republicans’ assumptions that the wealthy would put their money back into America? Two words: Tax deductions. When you pay higher taxes, you think more about deductible spending, which tends to be domestic and not foreign. When taxes are lower, the net worth of deductibles isn’t as big, and therefore it gets ignored in comparison to the large profit available when saving up or investing in overseas ventures. So we cut taxes, the rich save more and spend more abroad, there’s less domestic investment, and the economy stagnates. And this is good how?

Conversely, every dollar put back in the hands of a poor man is immediately returned to the economy. Living by necessity dictates, that they can’t save or invest abroad. They spend their money quickly, which inevitably translates into more profit for those rich guys at the top. In actuality, “trickle up” may in fact be a far more effective economic theory than “trickle down” ever could be. So if we really want to reduce the deficit, and improve the economy, letting the Bush tax cuts for the wealthy expire, while preserving the cuts for the lower and middle class, should simply be a no-brainer.

4 comments:

Anonymous said...

Where to begin?

Investing abroad is not morally worthless, unless you have something against Indians and Chinese. And anyway, even if they are spending some huge % of the increased after-tax income on foreign investments, that is not clearly a bad thing for the US economy. First, foreigners buy our exports. Second, presumably some of the dividends these investors receive will be spent in the US. You almost seem to be making a case for protectionism of some sort.

Also, this idea that the rich just sit on their money while the poor put money to productive use is more than a little absurd. Even if the rich spent none of the tax cut, their investing would still be good for the economy.

But! Lo and behold the rich are more likely to spend the tax cuts money than the poor are: http://voices.washingtonpost.com/ezra-klein/2010/08/research_desk_investigates_do.html

Lastly, the CBO graph doesn't really mean what you seem to think it means: http://www.themoneyillusion.com/?p=5164

-r.d.

Anonymous said...

r.d. is right (at least to some extent). You're making jumps that just aren't there in the economic evidence. I also find your implicit protectionism is disconcerting.

However, r.d., lower and middle class incomes have undoubtedly stagnated, while high-earners are earning more and more. Especially given the causes of the financial crisis and economic collapse, this is not the time to champion trickle-down and deregulation. It seems your ideological positions are causing you to make some jumps too, after glancing at both of those articles (though it is cool to see that you look at a politically diverse range of sources). I think that the plurality of economic research shows quite clearly that the short-term multiplier of middle and lower-class households is much higher than for top earners, who really do tend to save it--at least in crisis.

-t.h.

Anonymous said...

You go Gordon, The nit picking in those comments tells me that those posting are unable to truly dispute your logic. A "Lefty from Home"

Anonymous said...

t.h.,
I don't mean to claim that in each and every case the rich spend more of the tax cut. But that article gives examples. Where are yours? You are merely stating theory. Moreover, there are different ways to save. If the rich save by investing in a mutual fund that can be great for the economy. I doubt many of them just stuff it in a mattress.

-r.d.