The Trickle-Down Myth
When was the last time you bought something you didn’t want, simply because you had enough money to do so? I imagine most peoples’ answers would be the same as mine: Never.
This is the essence of why trickle-down economics doesn’t actually work.
The argument behind trickle-down economics is: If you put more money in the pockets of business owners, they will be able to hire more employees and pay their employees more, thus allowing the wealth to trickle down from the ultra-wealthy to the commoners. All we need to do to debunk this idea is to look at employees as the transaction they are in business’s eyes. Unless it’s a nonprofit, a business’s objective is to make money, which it does by selling a good or service to a customer. If there’s enough demand for that good/service that new employees and their added productivity would be able to make the company more money than it would cost to pay them, then it makes economic sense for the company to hire those new employees. In the eyes of a business owner, a new employee means less profits, unless the market calls for more employees. Business owners will thus hire (“buy”) new employees only when doing so will allow the company to make more money, not simply because they are able to afford it, just like how you and I don’t buy things we don’t want simply because we can.
This means that the demand is what drives employers to increase employment, not the supply of money to pay them with. The business world is tough, and businesses that hire employees without a profit-based need to do so will likely not succeed. The ones that succeed are the ones that turn the best profits, which necessarily means only employing people when the market demand for their good/service makes hiring new employees profitable.
So if demand is what drives employment, that would dispel another idea often used in conjunction with trickle-down economics: that wealthy people are “job creators”. Sure, they are the ones who employ others, but they only do so when the market creates the demand for it. Market demand is what really creates jobs. And what creates market demand? Consumers. The middle class is the largest sector of consumers, as they have enough money to buy non-essentials, and there’s far more of them than ultra-wealthy people. For this reason, the middle class are the job creators, not the upper class. If we want a stronger economy, we need to grow the middle class, not make the upper class wealthier than they already are. This is why taxing the wealthy more and using that money to fund social programs to grow the middle class is a more effective way to stimulate the economy than tax cuts to the wealthy.
Given that trickle-down economics was popularized about 40 years ago, we can look at the numbers to see if wealth has trickled down. Over the past 35 years, the USA’s GDP per capita has increased by over 70%, when adjusting to inflation; in that same time, the median household income hasn’t even increased by 20%. This means the gains are disproportionately felt at the top, which can also be seen in the increase in wealth inequality in that time. The graph below shows both. Notice how the blue line increases much faster than the red.
Figure 1: GDP/Capita and Median Household Income by Year, 1985-2018
If you look at the median income trend line (red), you can notice that the only times of significant increase were between 1992 and 1998, and between 2011 and 2016. These periods fall within Bill Clinton’s and Barack Obama’s presidencies, respectively. They were the only Democratic Presidents in this period - the party that’s less likely to follow trickle-down economics. In this time frame, the only years the tax rate of the highest tax bracket was increased were: 1991, 1993, 2013. These line up perfectly with the two periods when median household income actually increased. During the past 35 years, the GDP/capita has almost always gone up, but that was only felt by the average American when taxes and policies like minimum wage made sure of it. In other words, money never trickled down.
This was further confirmed by the Kansas Experiment, a large tax cut in Kansas intended to be “pro-growth” according to Governor Brownback, who enacted it. It was a complete disaster by any economic measure, hurting GDP, job creation, unemployment, and state budget.
If this is the case, why do we still hear people use the trickle-down argument today, after 40 years of evidence that it doesn’t work? Well the answer is pretty simple: trickle-down policies benefit the wealthy, and the wealthy own the media and can lobby politicians with their wealth, to push for policies that will make them more money. Basically, they’re using their status as wealthy people to push ideas that make themselves more wealthy.
Path Forward
This one is pretty simple: we should support politicians who want to increase taxes to the wealthy and increase welfare programs to build a larger middle class. Doing so will make the economy as a whole stronger, which benefits everyone, even those who don’t directly benefit from the welfare programs.
