Trickle-Down Economics Has Never Worked And It Never Will

For decades, Republicans have pushed policies that give tax cuts to the super-rich with promises the wealth would trickle-down. It never does. Here's why.
President Ronald Reagan’s Cabinet, 1981 (Official White House Photo)

President Ronald Reagan’s Cabinet, 1981 (Official White House Photo)

Unless you’ve spent the last decade under a rock, you’ve probably heard the terms trickle-down and supply-side economics whenever pundits discuss wealth and income inequality or referred to in political memes. But the problem with just invoking these terms alongside some variation of the phrase “scheme to redistribute wealth upward,” is that it makes supply-side economics seem like a sinister plot cooked up by evil masterminds in black suits sitting in darkened chambers. In reality, the history and thinking behind it is both incredibly naive and face-palmingly insipid, and since we don’t talk about that enough, I thought we should fix that problem.

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How Trickle-Down Economics Works

Imagine for a minute that you own a house and your loan servicer comes to you with an off-the-wall idea. They say they’re wondering about cutting both your loan amount and monthly payment in half and ask if with the money you’d save, you would be interested in buying another house as an investment property, rent it out, and start building your own little real estate empire with the money you’d make in the process. You reply that it sounds like an interesting idea and the scenario they presented is definitely plausible, and next thing you know, there’s a letter in your mailbox.

Your loan and monthly payments were indeed cut in half and your loan servicers will be happy to help you close on your new investment properties. However, since you have other expenses, you decide to use the newly freed-up cash to pay off your credit cards, get new furniture you’ve been meaning to buy, pay for renovations to improve your current home, and, of course, set a little more aside for a rainy day. After all, you’re under absolutely no obligation to buy some sort of investment property. You’ve just suddenly found yourself with more money and are using it in ways that make the most sense for your financial situation.

Why buy another house and put it up for rent, you wonder. Dealing with renters is complicated and can get difficult quickly as you try to vet applicants and figure out how to collect and enforce payments. You’re still on the hook for maintenance and repairs. If things go wrong, you’ll have to pay a lot of money to lawyers and deal with negative publicity in crowded markets where rents keep soaring through the roof. Sure, to some people, this is no big deal, but there are easier ways to put one’s money to work and your cash flow has improved to make many of those options suddenly accessible.

Your loan servicer, on the other hand, is in trouble. By giving so many customers such massive discounts, they’ve cratered their portfolios, and while some customers are buying investment properties and bringing in new business, it’s not nearly enough to offset the loss of revenue and loan value. But it’s not like the servicer has any room to complain about this rather predictable outcome. They didn’t tie the halving of your current loan to the purchase of a second property through them, finalized at closing. They just hoped you would do it and that your financial goals would match theirs, and now have little recourse other than to scrap their discounts, which will be extremely problematic.

What Is Trickle-Down Economics Exactly?

And this, in a nutshell, is how supply-side economics works. It makes more money available in the hope that all that cash will end up creating new businesses and jobs just because it’s not being collected by tax services. Instead of funding schools, infrastructure, science, and public projects that take care of a country’s citizens, that money stays in the pockets of the wealthy. Politicians then ask for them to pretty please, with a cherry on top, if they could, create some jobs instead of buying back stocks to fatten the pockets of their businesses’ shareholders, and then gambling that the gain from those new jobs will offset the cost of the tax cuts with no mechanism to make sure this happens.

For a real-life example of this, look no further than Wisconsin’s deal with Foxconn. The state thought it was giving the Taiwanese company $4 billion in tax breaks and investing tens of millions into infrastructure upgrades to support 13,000 new jobs in a 20 million square foot next-generation manufacturing plant by the end of 2020. But within months, the 20 million square foot next-gen plant became a million square foot very current-gen plant and a “research lab,” the 13,000 jobs became 5,200 jobs, then 1,800 jobs, then 1,500 jobs, and the current grand total being employed and paid by Foxconn in the state is all of 156 workers.

Take heart though, the company insists that it will still totally create all those jobs and invest $10 billion in Wisconsin. Just ignore the fact that they’ve yet to live up to a single promise they made and missed every deadline, no matter how scaled down. And while this case is egregious and has wide exposure thanks to President Trump and the GOP taking numerous victory laps when the deal was inked, there are actually hundreds of little Foxconns no one talks about all over the country, as illustrated in a deep dive into supply-side economics by John Oliver.

If you were a customer who walked into a coffee shop, paid for a cup, and were given nothing in return, you’d be angry. If you also learned that the manager of that location got a promotion and a raise for just taking customers’ money and giving them excuses instead of coffee, you would be downright livid. But although this is an imperfect analogy for the transactional mechanics of trickle-down, this is basically what’s happening. Instead of collecting projected revenues to use them to invest in providing the same portfolio and quality of services as any civilized nation, just about every level of government in the United States is slashing itself to the bone after lobbyists dazzle them with smoke and mirrors.

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The Effects Of Trickle-Down Economics

In the end, the companies make money from fatter profit margins, lobbyists get bonuses for the negotiation of sweetheart deals, executives are rewarded for boosting their margins and cutting costs, workers are told to be happy they have a job, and governments have to go into debt to fill potholes, put out fires, and teach kids how to read. Over the last four decades, this means that while tens of trillions of dollars weren’t transferred from public coffers into the top quintile’s bank accounts, as pundits often like to say, they were put out of reach of taxation services, meaning that they couldn’t be invested in funding solutions to numerous problems currently plaguing the voting public.

Meanwhile, because the income spared was usually that of the highest-earning and asset-rich quintile, they ended up with almost all of the wealth — well, 93% of it to be exact — because they were spared from significant taxes on the hope they’d somehow create enough jobs and tax revenues to rebalance government budgets. At the same time, half of Americans who needed those public services to get a better education to pursue more opportunities in both private and public sectors, afford better healthcare, and have savings to invest in assets that appreciate, have a negative net worth.

In other words, half the country would love to own nothing because it would be more than they have now, while 1 in 10 Americans are being worshipped as geese laying golden eggs despite the fact that most of the golden eggs they’re laying now aren’t so much golden but covered in gold foil quickly stripped off by their peers on the premise that it’s required to produce the next egg, one that this time, will certainly be a solid 24 karat ellipsoid. And because they’re the ones with the cash flow to invest in new ideas and watch profits of the businesses they fund like hawks, demanding returns early and often, social mobility takes a tumble since there’s now less money to go around outside the top quintile, and therefore, fewer opportunities.

Hold on one second, you might object. Surely politicians advocating supply-side economics must have had good reason to suspect that it would work out, right? They must have talked to experts, done pilot studies, and maybe, what worked on a small scale just didn’t translate well. It would be ridiculous if a few influential Republicans walked into a steakhouse bar in 1974, had a chat with an economist whose ideas were roundly dismissed by his peers as half-baked and simplistic to a fault, and formulated a fiscal and governing philosophy for the next 50 years based on a quick drawing on the back of a cocktail napkin, wouldn’t it?

But that’s exactly what they did, and they’ve been an unmitigated disaster the minute we scratch the surface under GDP stats and broadly aggregated percentages for the reasons we were just exploring. Even worse, thanks to the central banking policies extrapolated from Art Laffer’s napkin, and the massive stock market bubbles created and popped since the 1990s, we may even end up with negative interest rates, which would destroy the very notion of savings as banks would have to charge us to keep our own money in a rainy day fund.

At this point, supply-side economics is more of a religious tenet than an actual policy, a circularly reasoned axiom based on a stream of consciousness from an economist discredited long before he even tried to pitch his idea to conservative politicians easily dazzled by bullshit that looked like actual math and allowed them to rally big money donors behind them. As proof of the latter, consider that another favorite idea of conservative pundits, austerity, or slashing public budgets in times of financial crisis to avoid borrowing instead of trying to stimulate the economy with new projects and ideas, was based on an Excel error. It’s honestly hard to decide which is worse, a policy based on wishful thinking on a cocktail napkin, or a mathematical error no one bothered to check despite numerous warning signs that both were failing in the real world.

So if we’re going to improve our bizarre economic stratification and the social and political side effects it produces, we need to stop treating ideas like austerity and trickle-down economics as serious theories because the truth of the matter is that they aren’t and never have been. They’re wishful thinking and simplistic arithmetic masquerading as expert analysis and promoted by the few who benefit directly from treating them as indisputable holy writ despite ample examples of them being about as successful in the real economy as an injured turkey lost in a forest, trying to walk uphill from a den of hungry coyotes. We couldn’t afford to give them more chances when they were first adopted, and we sure as hell can’t give them even more chances now.

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Opinion // Economics / Republican Party / Trickle-Down