Don't Trickle on Me!
77
Trickle Down aka Supply Side
Ever since the days of Ronald Reagan's presidency we have heard the term Trickle Down applied to economics. The actual theory is called Supply Side Economics Theory, and it is an idea that if you cut or eliminate taxes on certain high income people, businesses and corporations, the wealth produced at these highest levels will somehow trickle down to the middle and lower income groups.
To my mind it harkens back to the old maxim "What's good for GM is good for the nation." In other words job creation and lower prices will result from giving breaks to the wealthiest people and businesses because they will naturally invest this money in business infrastructure and equity markets.
The idea as stated long ago by John F. Kennedy, was that "a rising tide floats all boats." Those who advance this theory believe that economic growth flows down from the top to the bottom. This is the basis for the theory.
Reaganomics
So it was Ronald Reagan who most ardently supported this theory, and he quickly put into action when he became president. He lowered the taxes on the highest income groups from 78% to 28%. Later President Clinton further lowered taxes on the wealthiest income earners by 2.6%. In 2001 President George W. Bush lowered them again by 4%. Thus over the past two decades the wealthiest Americans have had their taxes lowered by 56.6%.
Another aspect of this idea is to lower the capital gains tax, which today at 15% is at its lowest rate ever. To define a capital gain you need to know that it is a profit that results from the sale or exchange of a capital asset; such as stocks, bonds or real estate. Thus it is that portion of gain which exceeds the original purchase price. Since this is not income in the traditional sense, the tax is designed to capture profits that otherwise might go unclaimed.
The most important feature of trickle down or supply side was a great reduction of the tax collected from capital gains, from people with higher incomes and from corporate taxes. Ts it was seen to benefit business growth.
In addition there was a large reduction or complete elimination of excise taxes. To define an excise tax, you need to know that it is a tax levied on goods produced created within the country.
David Stockman
President Reagan's point man on supply side economics was the budget director, David Stockman. He was most directly responsible for introducing the change of name from trickle down to supply side, or, as he told journalist and author William Grieder; "It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory."
Propoents' views of the Trickle Down or Supply Side Theory
Because the trickle down theory has been called demeaning by detractors, there are some proponents of the theory who claim that the term trickle down does not exist in economics, that it is an invented term used by those who wanted to make the idea distasteful to the public. Be that as it may, the theory has been used and put into practice, and it has its advocates.
From his position of power within the Reagan administration, Stockman claimed that supply side economics was squarely within the history of favored and beneficial economic traditions, believing that a position of economic laizzes-faire would benefit the entire the entire nation over time.
Of course, he did not say that all would benefit equally, or even adequately, and after time, many felt as if they had been left out of the promises given by Stockman and Reagan. Still, at the time, in the climate of the economy when Reagan took office, it seemed as if it just might work. for some, it did, but for many, it did not.
Criticisms of the Theory & Practice of Supply Side Economics
The idea that trickle down is good for the nation was ridiculed more than 60 years ago by Franklin D. Roosevelt. John Kenneth Galbraith also said that it had been tried in the past and had failed. Indeed, in the 1890's it was known as the "horse and sparrow theory."
Galbraith said that "If you feed the horse enough oats, some will pass through to the road for the sparrows." He also pointed out that he believed that this idea lead to the Panic of 1896. I have often thought of it as how a man who drinks fine wines will eventually allow what remains of the wine to trickle down to the bottom of the outhouse,
To me trickle down is a demeaning term and is not an adequate way to make sure the middle and lowest income groups receive anything but the manure from above. Many people who learn the true meaning of this idea have come to despise it as snobbery. Indeed some have even compared it to Marie Antoinette's snobbery when asked if there was food for the starving peasants allegedly replied "let them eat cake." In effect our nation has being subjected to the very same class consciousness we fought against in 1775, against the haves and the have nots.
What I think of trickle down theories!
Keynesian Economics and Tax Cuts
Another school of economics is the Keynesian, which maintains that broad tax cuts at all levels can be used to stimulate economic growth. It is an idea that many economists prefer to the selected tax cuts proposed in the supply side theory. which maintains that giving tax breaks to the wealthiest will cause the wealthy to invest, and thus creates growth in the economy.
The theory of Keynesian Economic Theory is rather complicated and much too much so for this hub but in brief it outlines the idea that the state can stimulate economic growth and improve private sector stability by careful use of taxation, by creating public projects and by controlling interest rates.
You can learn more at the following website: http://en.wikipedia.org/wiki/Keynesian_economics
Of course there are many economic theories which have been proposed over the past decades. It is difficult to know which one is the best, but as one of those who is not wealthy and probably never will be, I prefer that the government use the model which most completely favors the largest number of people. In my view the Keynesian seems to fit that niche rather nicely, especially with modifications that have been added over the years.
What I do know is that the supply side theory has, in my opinion, failed me, and I believe, failed the nation at large. A few seem to have prospered under it, but witnessing the failures of our government and the excesses of supply side deregulations, I have come to the conclusion that I do not want anyone to trickle on me!
Obama's Ideas - Bottom Up economics
Supply Side Economics Does Not Seem to Work
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Thanks, Level1diet!
Ironically I just wrote a hub screaming against this at some point as well. I may be one of the few conservatives who feels trickle downing sucks to the bitter end. Rich will not share benvolently with the rest of us poor folk, so I don't expect this bailout would even help us but it will definitely aid the richies.
Geez I'm tired...
Great job, Chef Jeff! I especially love the 2nd trickle-down cartoon. :) The more I understand about the economy, the less sense it makes. So many policies have obviously been designed to reward the rich at the expense of the poor and middle classes... why has it been so easy? And why have we allowed the madness to continue?
Let's just hope it's about to get better.
I can't think of any reason why a billionaire would oppose Trickle Down economic theory. Good synopsis, Chef Jeff. President Reagan championed the theory, mortgaging our grandchildren's future. George W. Bush picked up where Reagan left off, creating hugh debt as cover for proposal to privatize, i.e., abandon, Social Security and other programs created by President Roosevelt that have stuck in Republicans' craw ever since the 1930s.
Your take on this is absolutely correct. Trickle down would only work in a society of philanthropists where the rich cared about the poor. Do you know anywhere like that?
I think we are seeing how the trickle down theory really works with our current big business crash and tax payer bail-out. It's a good "real life lesson" for kids.
Yes, Karen and others - the trickle down theory is great for those who have, but bad for those who have not. Being in the latter catagory, I think I like the Keynesian ideas better. Too bad we have allowed a certain portion of our population to label them as Socialist, as if socialism is an evil thing! Sometimes I wonder if we are properly educating our masses of students?
Can't people tell the difference between Socialism and Communism? Somehow the two get mixed together in the fray! I wonder if any of those people who think Socialism is an evil know that many of our best and most faithful European allies actually have socialist-democratic governments?
Reminds me of the branding of the word Liberal as if it were a name of a disease! To me Conservative means looking backwards to preserve things as they were, while Liberal means to look forward to making things better. Some things are well worth preserving, but not all things.
That is why we dumped slavery, finally recognized the inherent right of minorities & women to vote, and not all that long ago recognized the "God-given right" of all people to attend school together, etc., etc.
Thus Liberal Arts in school is a method for preparing students to become better citizens, more informed and better able to make well-thought out choices.
noblesse oblige [no-bless oh-bleezh] Noun
Often ironic the supposed obligation of the nobility to be honourable and generous [French, lit: nobility obliges] The concept is ludicrous on its face.
Trickle-down economics.
Take money from people who barely have enough to get by and give it to people who already have more money than they could spend in five lifetimes.
This will encourage the second group to invest in new businesses that will employ the first group and enable them to earn back the money that was taken from them in the first place.
Even if this made any sense, it assumes that group two will do a specific thing which, in fact, they rarely do.
Most often greed increases exponentially to the amount of wealth accumulated.
If you give money to the rich, they will use it only to make themselves richer with no thought of ANY other goal or consequence.
If that means investing the capital in a foreign market where labor is cheaper, that is what they will do.
They will do anything to assure that their wealth continues to grow endlessly no matter how much they have or what injuries befall others as a result.
When American labor has been forced to accept the same wages and working conditions as those in China or the Philippines, only then will the worshippers of Mammon bring their factories back to the U.S. and hire American workers.
Jeff: This is really well done... One of the courses I had to take in college was economics 51 (It was a bear....) Anyway, both of these concepts were discussed at length and I can honestly say each have their positives in theory.
All that being said... IN THEORY. Most ideas work in that sense. SS economics would work if there was no GREED. (Excuse me while I grab my composure)... And Keynes' ideas would be perfect if everybody lived within their means. (Again...)
My point is this. Without going to a strictly socialist, or God forbid other type of fiscal economy, there are going to be issues. In theory, (there's that word again) there needs to be a hybrid of the two. And it's going to take someone a lot smarter than I to figure that out.
BTW: I'm NOT a socialist. I'm a fiscal conservative who feels we should be able to do what we want with our money, AFTER, paying our tithe to government and others.
The bottom line is this: We are all responsible for what we've been given. If we use it wisely,we will prosper (maybe not by the world's standards) but then that's a whole other issue.
I enjoy your writing Chef!
Chef Jeff, I agree that no group should be given any sort of special treatment for any reason, even the idea that they might help others. But to be perfectly fair to all requires that all be taxed at the same rate, regardless of income. When Reagan cut taxes on the highest bracket from 78% to something lower, he wasn't giving them a break. They still paid more than most people. Who could live on only 22% of his income?
If all were taxed at the same rate, no one would think even for a moment that he could live at someone else's expense.
CWB I agree - the concept of noblesse oblige as written about in your hub by the same name, it is rare in history that the wealthy give back to the poor, except perhaps when nobles would toss otherwise worthless brass coins on certain holidays to insure their place in heaven (amongst the rulers, of course!)
http://hubpages.com/hub/NOBLESSE-OBLIGE
When America was founded there was an expectation that we would leave the old class system of Britain and Europe behind. The Yeoman farmer could with hard work and diligence make himself a wealthy man, and his family would posper and bebefit.
However, we all know those days were not to last for ever. Once the United States began to meddle overseas, the budgets went up. I believe it all started in the American Civil War, when the cost of the war was so hign that the standard government income of the time was rapidly outstripped. Using import duties and the like was a low-income method of gathering money and could't feed the growing war machine.
But afterwards taxes became more common, until in the 20th century suddenly they became "normal". Our level of taxation is not the highest in the world, but it is not the lowest, either, and our borrowing, adding to our 10 trillion dollar debt, is perhaps the highest.
If the Republicanss call the Democrats "Tax and Spend" then the fair thing to say is that the Republicans thus far, since Reagan, at least, have been the "Borrow and Spend", leading to huge debt we may never be able to pay.
I didn't know Clinton was applying this theory, too. But, there's no denying that things were going pretty well while he was in office. Wasn't the National Debt in the black for the first time? I'm not sure, so don't hold me to that.
This country seems like it's being run by organized crime. I'm pretty sure that's what is going on, and it doesn't matter who gets into office next, they will be taking orders from the mafia.
Rob Jundt - thanks for the comment. Socialism is not a bad system for people who want it. I lived in several European nations which are basically socialist, and the people generally like it. Of course there are always some who hate whatever form of government and economy one has, but for the most part if there were enough people to oppose a system, then it would be overturned.
That said, the U.S. would never tolerate a truly Socialist government or economy, always keeping in mind that they can and often are two different things. However, just having the government help out people does not a socilaist economy or government make.
We must never forget that the entire reason for this nation and government is to put the people in control. We are the government,and we elect a few representatives to do our will.
At least, that is the theory. Again, as you point out, theory and practice are often two different animals!
Aya Katz, I know the tax rate was often unfair to those who made good money. The comedian Lou Costello died poor and homeless due to failure to pay close to 90% of his income in taxes. That was patently unfair.
Still, is it fair to allow a wealthier group to avoid all taxation? Reagan's plans, never fulfilled, were to relieve the wealthiest of their tax obligations, which puts the taxation squarely upon the shoulder of the middle income people.
Steve Forbes championed the idea of a flat tax, but it never seemed to catch on. For better or worse,and I happen to think its for worse, there is much income amongst the wealthy that never gets taxed, while every penny I make is subject to taxation. That's not fair eithr.
If it were just income from a job, that would be one thing - we could find equity somewhere. But since there is so much wealth generated from non-job realted sources - stocks, bonds, stock market, currency markets, etc., how does one tax that income? It is, after all, still income, but unless the second set of tax laws is (a) in effect and (b) enforced, that income at times is given so many loopholes as to be non-existent amongst the wealthiest of us.
Fair is fair, for one and for all. Perhaps this is the goal we should strive for - that, plus working to remain within our budget and to stop wasting so much money in foolish wars, aid to other nations and so forth.
There was something McCain said at the debate that was patently untrue, yet it was true at the same time. Corporations are taxed at a high rate, but with the loopholes available to them, they pay very little of that percentage, and many pay nothing at all. He blamed this high tax rate for the reason why so many businesses go overseas, but that is also untrue.
They flee because they can go to cheaper labor markets in other nations. They have admitted as much.
Great Post Chef Jeff. The "Mavericks" are only "Mavericks for the Rich", they don't care a damn about us. It is sad government and congress is aiding them more, the press too.
Actually,the name Maverick is interesting to me since in the old west it usually meant an unbranded stray that was wild, scrawny and didn't fit in well with a herd. It was usually shot and prepared for the next meal along the trail.
Odd how the word now means something positive, when in fact to me it seemed rather the opposite.
But you are right - the so-called Mavericks are a legend in their own minds. Palin is no maverick, and if those state workers who now decided to testify against her are any clue, she may also not be governor for much longer.
One has to wonder if there is going to be a recall up there before long?
Vote for McCain!
CW, I don't know if Clinton had any particular attachment to it other than to simply work around it. Still, we have to remember that the Congress was Republican during his term of office.
I had to laugh yesterday when I watched a FOX report on this and they managed to blame the entire meltdown on Democrats, never once mentioning that Republicans also had a huge hand in it - some would say a controlling hand.
Upswings and downturns are a part of every economy, but trickle down is an insult to the inltelligence of the Common Folk like me.
Misha, vote for whomsoever you choose but realize that McCain has a large footprint in the rampant, irresponsible deregulation that has helped fuel this fire. I know Obama is also no saint but I am not voting for a saint. I am voting for the person I believe can solve this and govern wisely.
I have known McCain for many years and even though I used to think him capable of governing, that was then and this is now. I can not support McCain under any circumstances. His choice of Palin instead of many other better qualified VP candidates solidifies my belief that he does not have the sound judgment to run this nation.
His choice of advisors chills me as well, especially Phil Graham, the man I hold most personally responsible for the mess we are in today.
But as I said, we all should vote for the person we believe will do the best job. For me, that is not McCain, but rather Obama.
LOL Chef, I am just trying to make some fun out of this elections - posting pro-obama on mccain hubs and vice versa :)
Even if I could vote in United States, I wouldn't, pretty much like I don't vote in Russia, where I can.
Jeff, that's what you get for watching Fox News.
Yes, CW, shame on me! LOL!!! For some reason most of our cable channels went out so I had to do something to pass the time. That's my excuse and I'm sticking with it!
But truthfully, I do like to see the spin different channels put on things - it's part of the blame game they keep trying to put on the other side!
Oh, Misha! Shame on you! LOL!!!! You'd make a great politician doing that! Ha! Ha!
Did you support Gary Kasparov when he tried to run again Vladimir Putin? Or were you no longer able to cast a vote in Russia? My wife still votes in Spain, so she keeps pretty well up on things there.
I just found this hub, so I'm 8 days behind. Thanks Chef Jeff for starting the conversation. I'd like to make one comment, whic no one has pointed out so far, which is the sad fact that niether a modified Keynesian nor any form of a trickle down scheme [meaning whatever division of taxation] takes into account a significant piece of reality, namely, the planet is glutted with manufactured goods. There's only so much consumers can buy. The world is over producing stuff thereby exhausting the planet. Before the money market meltdown, the rich were getting rich mainly by creating bubbles of speculation. Nothing there for trickle down to happen. I'm no economist, so I can't articulate this idea any further. Maybe someone here can expand on this thread of thought. Thanks for letting me add my two cents.
Viteb, I agree. There is no one theory or practice which seems best suited to everyone in any market conceivable, so we have to work on flexibility to cover what may come along. Unfortunately, we do not possess a system that can (a) see the crisis train coming if they stood upon the tracks, and (b) a system that can adapt quickly to avoid major disruption.
Thanks!
Have just become a hubber weeks ago. Your hub is exact. I just finished one. Thanks for insightful way.
Milton Friedman and J.M. Keynes were both inflationist hacks whose ideology benefited government and its corporate hangers on.
Central banks create new "money" (liabilities) out of thin air for the benefit of their two principle clients: the commercial banks and government.
If you don't strike at the root of the problem, no ammount of Keynesian or Monetarist economics will fix anything.
Thanks for the comment, Dog On A Mission, and in one sense we agree 100% - if you don't get to the root, the weed will always come back, tenacious little things that they are!
Cheers!
Chef Jeff
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level1diet 3 years ago
Benjamin Franklin could not have put it better. Thumbs up, Chef Jeff.