A Trickle-Down Economics Primer, and Why It No Longer Works

My first presidential vote was for Ronald Reagan’s second term, mainly because I agreed with his “trickle-down economics” philosophy. It’s a term we hear often right now, but many don’t understand what it means. Meanwhile Senator Obama refers to a new economic structure that works “bottom up.”

In its simplest sense, trickle-down economics means the more money the rich have, the more it will trickle down to lower classes when they spend it. So, when the government “lets” the rich and corporations “keep” their money (low taxes), they will use that money to buy American products and services, and invest in American businesses. The expenditures, like new cars, new homes, servants, accountants, a new yacht, and corporate expenses, will create jobs and economic growth. Investment in new businesses, and helping grow existing businesses, also creates jobs. The vast majority of jobs in America are small business jobs, and helping them grow simply helps create more jobs. The money the rich don’t pay into taxes gets spent in America, and everyone benefits.

Does it work? It certainly sounds like it makes sense. And it used to work exactly as explained. But trickle-down economics depends on two things. One, a closed system, where the money stays in America, and two, an investment structure in America that encourages investment in growing businesses to create jobs.

In the 1980s, America was almost a closed system. Worldwide business existed, of course, but in general, when an American wanted to buy a yacht, they bought it from an American yacht company. Even when they bought a Mercedes, they bought it from an American-owned Mercedes dealership, so a lot of the profit stayed here in America. For the most part, the money did trickle down, which is why we were so happy in the 80s. The 90s was a boom, too, because the rich invested in new Internet businesses and the economy grew dramatically, leading to President Clinton taking credit for Reagan’s system that he simply didn’t break. 

So why, when Bush and a Republican Congress forced through the tax cuts to the super rich a couple of years ago, did the economy grow, but the money didn’t trickle down?

The system went wrong because the two legs of trickle-down economics were both broken.

• Leg 1, a closed system. President Clinton passed NAFTA, opening our system. If a rich American wants to buy a yacht, they are just as likely today to buy from Italy, France, Egypt, New Zealand, or Germany as in America – actually more likely because they’re cheaper in some of these countries due to cheap labor, and they avoid American sales tax. If a rich American wants to buy a Mercedes now, they can just as easily order it directly from Germany. And cheap labor? Undocumented workers send billions of American dollars to their relatives in Mexico. The rich vacation in Dubai or Italy instead of California or New York City. With so many products being manufactured in other countries, even basic purchases don’t benefit America’s economy. All of this is “trickle away economics,” as the money is trickling out of America, not down to Americans.
• Leg 2, an investment structure that encourages investment in growing businesses. President Bush oversaw massive deregulation of financial institutions creating a casino-level structure on Wall Street. Instead of investing in new and growing businesses directly, investors started putting their money into large groups which invest in commodities (oil, coffee, pork bellies) and large corporate stock in a short term profit methodology so they can show quick profits and sell more shares. Commodities investments do not create jobs, they are just ways that the rich pass money back and forth. The demand for short term stock profits from corporations actually eliminated jobs as layoffs and exporting jobs were perceived as positive actions so corporations were rewarded for increasingly pushing more work onto the lowest levels to show ever-increasing productivity. A company could not simply maintain and pay dividends, which benefit long term investors. Instead, it’s either increase productivity or die. Therefore, with the new system, there is zero trickle-down to the middle class, and even more trickle away to other countries.  
  

In other words, instead of buying American products and services, instead of direct investing in business growth, the rich, the large corporations and the investment groups have been playing games, spending outside the U.S., and keeping their investment monies outside growth-creating areas. And the result is today’s economic crunch. The middle class is holding the majority of the tax burden due to tax cuts for the rich, and the rich are keeping the money instead of trickling it down.

The current economic crisis is the death of the trickle-down economics philosophy, living proof that it has failed. While homeowners are being blamed for buying houses they could not afford, nobody is stating that the reason they can’t afford them is a combination of high inflation and stagnant salaries. The mortgage industry would be fine if trickle-down economics had worked. If the Bush administration had created a tax cut system that benefited the middle class instead of the rich, such as Barack Obama’s plan, and had regulated the lending industry more closely, home owners would be able to afford their mortgages, and the rich would not need to be bailed out.