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January 14, 2014
The Dismal Science
Trickle Down
by Adam Smith

There are certain phrases that immediately trigger in me the opinion that the person saying them is not serious or only knows how to repeat noble-sounding phrases that are actually empty and hollow. One of these phrases is when someone says they “favor trickle-down economic policies.”

When you hear that phrase you know that the person talking is either a moron or a deceiver. There really are no other alternatives.

Let me explain what I think people mean when they say this phrase. They are saying they favor policies that will only benefit the very rich. But then since the rich will have more money (like the aristocracy of old), they will pass along some of their increase to the peasants and poor in the village. Thus the benefits of the growing economy trickle down from the rich to the poor.

What is so odd about this saying is that it is often used to describe policies that help businesses expand and grow. They presume that the benefits of these types of policies will only accrue to the rich. There is no doubt that when business is good, the bonuses of management go up. But to assume that this is all the benefit from policies that help business is ridiculous.

When I was growing up and joined the workforce in the late 1970s and early 1980s, the economy was terrible. It was hard to find a job. The economy in the Carter years and early Reagan years was completely abysmal.

Then I remember in the late 1990s going shopping, and every store had a help wanted sign in their window. There were not enough people around to fill all the jobs available.

In the late 1970s, the minimum wage really meant something. You started at that wage and you only slowly increased above that wage ($2.35/hour I think), if you increased at all.

But in the late 1990s, the minimum wage was almost meaningless because businesses had to quickly increase the wages of newly hired employees or the employee that they had just trained would leave for another job. Almost no one stayed at the minimum wage if that business wanted to remain competitive.

The phrase “trickle down” first started to be used when President Ronald Reagan was trying to reform the tax code. He was cutting the tax rate on the rich by more than half. He was going to decrease it from 70-80% to 35%, and he stated that this would help grow the economy.

This is when the cry went up about trickle-down policies. We were told that this cut in tax rates will only benefit the rich.

But what happened was that the economy grew at a great rate for the next 20 years. Tens of millions of good jobs were created. Unemployment was so low and workers were in such high demand that we had an explosion of illegal immigration to fill the jobs. Despite the warnings about only helping the rich, the policies helped everyone across the economic spectrum.

Now if you really want an economy that only benefits the rich, you would need to do the following. First, you should have policies that do not grow the economy to create excess labor and drive down real wages. Second, have policies that grow the stock market, which really disproportionally favors the rich.

That way you can have wages of the rich increasing while the middle and lower classes stagnate. Oh wait — that is exactly what we have now!

In the latest employment report, another 340,000 people left the labor force. They are not working and have given up looking for a new job. These people no longer are counted as “unemployed.” In fact, to many politicians these people apparently just don’t count for anything.

The unemployment rate went from 7 to 6.7%. That sounds like we are making progress until you take the time to understand what the numbers really mean.

We only need a couple million more people to give up looking for a job, and we can get unemployment rate back to pre-recession levels.

What we need are policies that will help businesses grow. Instead what we get is a push to increase the minimum wage. Meanwhile, there are 20 million still looking to find jobs and support their families. The real choice is between growth and non-growth policies, not trickle down and non-trickle down.

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