What is Trickle-Down Economics?

Some people hate trickle-down economics. They speak of its “failure,” its “victims,” and they claim that it “doesn’t work.” On the other hand, some people like and endorse it. Before we get into the arguments for and against it, the question is: what is it?

My first exposure to the term came from reading those who endorse it and cast it in a positive light. They define it as the phenomenon that occurs when those of high productivity (which corresponds to income) are able to keep more of their earnings, passing on the benefits to those with less productivity (at least individually, not necessarily in aggregate). In other words, when “the boss” has more money to dispose, everybody gets a raise (especially when the boss’s competitors are giving out raises and he/she wants to retain employees). Benefits may not always take the form of higher wages, of course; they may also come in the form of lowered prices, increased hiring, or greater spending by “the boss” that ends up putting money in some other boss’s pocket, spreading the wealth around, eventually helping everyone.

Some rightly point out that “the boss” makes his money from the consumption of others, and so stimulating consumption (or removing anything that might be holding consumption back) also stimulates the economy and should result in increased wages, lower prices, or both. However, there are at least two problems with doing it this way. One is that increased consumption means increased demand, which will tend to raise prices, partly negating the effects. The other problem is that this indirect route is less efficient. Not all consumers are created equal. Some people are better at spending their money than others – at least in ways that will stimulate the economy as a whole. Some people are more productive than others, and productivity is equal to income (the value of one’s goods or services can be defined no other way than by the amount someone is willing to pay for them). One who makes a lot of money must have generated something of value for so many to pay them so much for it (unless of course there is fraud or force involved), so those with money (generally) must be producing something of value to people.

Of course, when “the boss” has “more money” is relative. More money than when? Since it is always possible for there to be more of a drain on the economy than there is, all economics is trickle-down economics. It is a redundant term. No matter how much of a drain there is on the economy, as long as some economic activity remains, and as long as somebody is receiving wages from someone else, there is trickle-down occurring. All economics is naturally trickle-down, because left alone, the markets reward those with the greatest productivity the most, and they (through the market and in conjunction with those of moderate productivity) can then reward everyone else. No matter how much a society might deviate from this through forced redistribution of wealth, some trickle-down activity (economic activity) will remain. All economics is free-market capitalism; it’s only a matter of how much there is. Even communistic, command-economies with much central planning experience some trade, whether it happens informally when the state isn’t looking, or whether it happens through the commands of the state. Government spending is still spending – but never by those who know best. One would have to be near-omniscient to predict what the people of the market will set as a value for any particular item. It isn’t that government doesn’t work at all; it’s that the free market works better, and history seems to suggest that socialist economies grow slower.

So, I get confused when I hear the claim that trickle-down economics hasn’t worked. That’s ridiculous; it’s the only thing that has ever worked. Where did all the wealth we have come from if not from trade? When people criticize trickle-down, what they seem to be criticizing is a relatively high level of trickle-down – that is, a high level of growth, preferring instead a relatively high level of central planning and retarded growth. Is it a relative term to them? Do they truly think it better to take away funds and hinder those doing good for the economy and give those funds to those who are less efficient and less competitive? I suspect, instead, that they do not even understand the term as I do and are in fact speaking of something else entirely. We are speaking different languages.

What is trickle-down economics to you?