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The Real Trickle Down Effect

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Giving tax breaks and other financial benefits to businesses and top income earners as a way to stimulate the overall economy has been a very popular idea with many in our country. It is a theory that has most commonly been referred to as “trickle-down economics.”

The idea is that money will eventually work its way down from the rich into the pockets of the needy through general reinvestment and job creation. While there may be economic indicators that support this theory, it seems the only thing trickling down from the top is a whole lot of foolish, greedy talk.

Many bankers and other wealthy investors who were once in dire monetary trouble are now finally turning a profit again. It is still early going, but instead of throwing that money back into the public market or private sector, most are hoarding their new-found wealth, fearful that they may once again find themselves in the red.

It is understandable to be fearful – especially after going from filthy rich to the verge of bankruptcy. For better or worse, this is an intrinsic trait of all humans. It is also a defense mechanism that works against the whole trickle-down theory, at least in the short term.

Another trait that goes hand-in-hand with fear is the urge to demand an immediate handout. We saw it in the banking sector and now, through demands for tax breaks and other government incentives, we are seeing it in the business and equity markets as well. (Ironic, actually, in all the tea-party, "big government" cacophony out there.)

Despite current economic indicators showing positive signs, most business leaders on TV, the radio, and the Internet are lambasting the government and its policy direction. They are demanding an actual reversal of course and sternly pleading for tax breaks.

Maybe part of it is because Ronald Reagan enacted tax cuts during his presidency and over the last few years, for whatever reason, everything Reagan has become popular. His legacy certainly is looked upon in a much more positive light despite him being out of office for more than 20 years (and despite the immense national debt and huge budget deficit he left behind.)

Economics is a complicated enigma of many factors working together, so I’m sure one can find evidence to back up any hypothesis, but even Reagan’s own advisors – the same ones that concocted the “supply-side” policies in the first place – have serious doubts to its success.

Yet, here we have business leaders, stock market advisors, and even TV show hosts screaming for the return of “Reganomics” as if its success was – and will be again – a certified slam-dunk.

One announcer on a CNBC stock market show this morning was screaming at his guests – and the audience – for immediate tax cuts for businesses in order to rescue us from these tough economic times. The host added that the current government policies and the idea of taxing the ultra rich were not only wrong, but down right atrocious (I had to turn down the volume as he was literally yelling – and not in a good, fun Jim Cramer or Dick Vitale sort of way.)

I am not sure what makes the talk show host and business leaders alike so sure of themselves when even the top economic gurus still openly debate what the best approach is.

While "Ronnie" may have some small part in all of it, the main reason is money. Any tax break is a direct savings for all companies involved and who can argue with that, right? So, any smart CEO or COO is going to fight for anything that helps his or her bottom line if its out there to be had. Then let those that enacted the legislation worry about whether it actually filters down to the rest of us or not. (Is that Gordon Gecko I hear in the background – "Greed, for lack of a better word, is good.")

Last Friday, I joined an old high school friend at a restaurant for a drink. He just started a new job as a pharmaceutical representative and he asked me to join him and some of his colleagues.

As it eventually does, the topic of politics came up. It didn’t take long for these young middle class folks in their suits and ties to voice outrage over President Obama’s spending policies and the idea of raising taxes on the wealthy.

Since I was the outsider, I stayed quiet and did not point out to everyone at the table that it would not affect them as it would focus on those that make much more than they did. As they talked, it dawned on me that they considered themselves in that esteemed upper class that would be taxed, despite facts which suggested otherwise, so shedding reality on their situation would only kill their buzz.

On the way home, my buddy echoed the feelings of his colleagues. He told me he couldn’t believe “the nerve of this Obama guy trying to raise our taxes” and how he couldn’t wait until the next election to get rid of him. I was astounded. Here was a friend I’ve known since he was a teenager; someone who could care less about politics. (That was until he quit his bartending job to push legal drugs to folks in smocks rather than those in blue jeans.)

When questioned about what truly bothered him about the whole situation, he didn’t have many answers. He ended his soliloquy with: “Well, that’s what our boss tells us all and he makes a lot of money. So, I’m sure he knows what he’s talking about.”

I simply smiled and let that one go. Not only because it was a pretty comical statement to make, but because I knew he has never been – nor will be – a registered voter, thus he wouldn't be getting "rid" of anyone. (I chalked him up to yet another soul who has fallen under the Voodoo economic spell.)

In the end, there are probably some that do take tax breaks and end up hiring more employees and reinvest in their companies, but most – basically because it's in our nature – will hold on to any extra cache that comes our way.

The idea of trickle-down economics was actually put in motion in the late 1890s. Back then it was referred to as the “horse and sparrow theory.” It was termed so by the premise that “if you feed the horse enough oats, some will pass through to the road for the sparrows.”

Unfortunately, the only thing truly passing through is a whole lot of greedy, noxious air.

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  • Jon Stewart just did a great, hilarious bit on that deliberately misleading AP report [which Drudge helped hype]: “47% of Americans pay no income taxes!”

    Never mind that those folks pay plenty of other taxes and barely scrape by in many cases.

    I think the AP has been taken over by right-wingers the last year or so. They’re always running ‘analysis’ pieces that are invariably anti-Obama.

    That damn biased mainstream media! lol

  • Glenn Contrarian

    Baronius –

    Try running the numbers again…but translating the dollars of Reagan’s deficits to the much-lessened value of today’s dollars.

    All the Republican talk about ‘fiscal responsibility’ is claptrap, Baronius. Who had the White House in the eight years before and the first three years during the Depression? The Republicans.

    Who had had the White House for well over a year when the 1982 Recession – which was then the worst recession since the Depression – hit? The Republicans.

    Who had the White House for seven years before the Great Recession hit? The Republicans.

    And in all three cases they had slashed taxes significantly below where they had been.

    And btw – IIRC, about $400B of the deficit we’re paying now is directly attributable to the Bush 43 tax cuts for the wealthy, Medicare ‘reform’, and prescription drug legislation that disallowed Medicare from being able to negotiate for lower prices. You see, unlike what you call ‘Obamacare’, the Republicans never bothered to worry about how to pay for their legislation.

    Show me a Republican who truly adheres to ‘trickle-down’ economic theory who has truly been fiscally conservative AND successful in making their state economy better, Baronius. Just one.

    “Reagan proved deficits don’t matter.” Dick Cheney.

  • zingzing

    “The debt of the Reagan era was microscopic compared to what we’re currently running.”

    post ww2, everything was fine until 1981, when it began a steady rise that didn’t abate until 2 or 3 years into clinton’s first term. then it was fine until 2003 or so, and it’s been getting steadily worse, and has been going up at a drastic pace since about 2008, i guess. (this is all as a percentage of the gdp.)

    reagan, however, did manage to raise it significantly, which was continued by bush, finally stopped by clinton and then buggered up the ass by w. unfortunately, that’s what a sinking economy and two fucking wars will do to a spending habit. w handed obama an economy spiraling out of control, but, supposedly, within the next few years, the spending will go back down to normal levels… of course, it’s easy to say “i’ll spend less tomorrow.

  • Baronius

    “despite the immense national debt and huge budget deficit he left behind”

    The debt of the Reagan era was microscopic compared to what we’re currently running.

  • John Wilson

    “Trickle down” fails (and it has demonstrably failed) because there is nothing to guarantee that money goes down. Mostly, it goes sideways, into other investments, and often it leaves the USA entirely. I don’t know any rich person who is buying a second home in the USA with their found money, but rather in Jalisco or Auvergne.

  • I already mentioned this in earlier posts, but today there is a good new article in the Wall St Journal today about the actual cost of the bailouts with updated figures.

    The bank bailout has already been repaid enough to show a profit. Even AIG and GM are likely to cost the government less than $50 billion apiece all told, and the government may be able to sell all or most of its stakes in both companies by the end of the year; depending on stock prices, that could be profitable too.

    The only sore spots are Fannie and Freddie, which may cost taxpayers over $350 billion in the next 10 years.

    Nonetheless, a much brighter outcome overall than anyone foresaw a year ago.

  • Let me stake out my middle-ground position and try not to bore everybody to death.

    Cindy’s position that trickle-down is a total myth, and Dave’s repetitive apocalyptic drumbeat about how dire the atmosphere is for business are both wrong, as absolutists often are.

    The stimulus bill, the health bill, the recently passed [too-small] jobs bill, and the proposed larger jobs bill — all, every one of them, contain substantial tax cuts and incentives for businesses. But you’ll never see Dave acknowledge this, because it does not fit his myth of Obama the Economy-Destroying Radical.

    The current business tax system is screwy, but not exactly for the reasons Dave says. The rates are technically high, but there are numerous large loopholes. Almost no business pays the ‘official’ rate, and some pay very little tax at all. More sensible would be lowering the rates and getting rid of the loopholes.

    Yet even the crassest loopholes have lobbying defenders. A couple that were closed in the health bill and accompanying student loan reform were immediately attacked from the right as unfair “power grabs” by the government. What they were instead were reforms that did away with wasteful corporate welfare.

    Cindy sees businesses as beasts of prey, and everything the government does which helps businesses serves as a beast-enabler, allowing them to hurt the rest of us even more than they already have.

    But we do need jobs, jobs are created by businesses, especially small businesses, and tax incentives can definitely help.

    I believe the administration has already done much more in this respect than they get credit for. If the partisan atmosphere allows it, I believe Obama will push for more job creation incentives for businesses.

  • People who believe in the myth of trickle-down economics are the same, in another incarnation, as those who believe in playing the lottery. As long as people are buying these sorts of tales about how things work, which are designed to help them maintain their religious faith in this economic system, the elite maintain control.

    If you think it’s your neighbor trying to screw you, you are looking in the wrong place. Unless you know any crack moms who posted millions of dollars in profit in the last quarter of 2009 after receiving all that bailout money…er welfare.

  • Doug Hunter


    Very good point. It’s always made me wonder what people think the rich do with their money. They either buy stuff stimulating the economy or expand their business providing jobs or put their money in the areas you mentioned to be loaned out for someone else to do one of the former. Even in the odd situation where they just hoard it in a closet they’re doing everyone a favor (at least theoretically). Some of it does end up in China, but the same thing happens when you hand it out to the poor and they run directly to Walmart.

  • Jim


    The “So called Rich” actual “reinvest” their profits by passively buying T-bills or holding cash in banks. This provides existing funding of goverment programs of new programs or new funding for purchases of assest for other businesses or person not related to the person passively providing the “$$CASH$$$”. The only time this does not work is if the hold their profits under their mattresses.

  • Arch Conservative

    An “environmental journalist” lecturing the rest of us as to our misunderstanding of the genius of King Barry’s economic policy?

    Obamacare, cap and trade, and whatever else Obama has up his sleeve will ensure that taxes do go up on everyone that is not exempt from paying their taxes due to membership in the Friends of Barry club. Tim Geithner, illegal aliens, lazy welfare deadbeats, they’ve all got it made. Middle class Americans…not so much as they will get squeezed by higher taxes stemming from the current administration.

    hen there’s the whole idea that we’re going to be able to pay for Obamacare when we can’t even pay for Social Security and Medicare. But that’s another discussion for another day.

    You’re not very good at disseminating propaganda about the One’s economic policy Bizzaroguy. May I suggest that in your future posts you endeavor to engage in something that is more in the arena of expertise of an “environmental journalist,” “note the ridicule” spreading Al Gore’s propaganda about global warming.

  • I’m sorry to say you don’t seem to be much more politically astute than your friends. You just have a different set of incorrect assumptions.

    Your analysis of “trickle down” here is kind of like a bizarre flashback to the ignorant rhetoric of the left from 20 years ago, with a bit of reductio ad absurdam thrown in for fun.

    The reason we need to cut corporate taxes so desperately now is NOT the trickle down effect or anything like it. It’s the effect which our high corporate tax rate, predatory unions and hostile regulatory and fiscal environment have created. We have driven businesses offshore and put them in conditions where they cannot compete effectively and their overhead is too high. The first step towards fixing that is to cut corporate taxes. Other reforms, especially in the area of government debt, need to follow as well.

    As for your scoffing at your compadres concerns, you or they are oversimplifying or unaware of the tax consequences of Obama’s current spending plans. While it is obvious that taxes are going up for the rich, they are also unquestionably going up for anyone who earns an income and pays taxes – though admittedly that’s a smaller group than ever before. There are taxes on all wage earners all through Obamacare, and it is strictly impossible to deal with the massive debt which the current administration has taken on without additional severe taxes in the long term. They may not know what they’re talking about, but even if it’s by accident they are dead right that their taxes are going up.