Economics Online Tutor

Fallacies of Republican Party and
Trickle Down Economic Policies
Trickle down economics is the main source of the
problems facing the economy over the past 30 years or

Trickle down economics is nothing more than wealth
redistribution to the very rich.

The historical record and basic economic concepts
support these claims.
Why not "let them keep their own money" or "let them keep what they have
earned"?  Isn't that the free market solution?  Isn't that the American way?  How
can it be called redistribution if they get to keep what is already theirs?  This is
the argument being made by conservatives.

The truth is that it is most definitely redistribution to give more to the wealthy
through changes in tax and other laws. It is not about “letting them keep their
own money”, or “what they have earned”. Those statements are simple political
rhetoric that sounds true to those who don’t understand how the system works.

Wealth ALWAYS trickles up. It is the nature of capitalism. It is even encouraged,
and not in itself a bad thing, due to the incentives that are involved in terms of
helping the overall economy.

No matter how progressive the income tax rates are, the wealthy never lose
wealth from the tax rates, and the poor never gain wealth from the tax rates. The
system says that wealth redistrubutes upward, always. When the tax rates on the
rich are lowered, this means that it redistributes at a faster rate. The question
becomes, not whether the rich deserve more, but how much the new gains
should be taxed. In the past the economy simply worked better when the income
tax rates were more progressive. They have become much less progressive, due
to lower rates at the top and more loopholes, and the overall economy has
suffered because of it. These changes are due to “trickle down” concepts. In a
practical sense, the change from “how it used to be” to “how it is now” is by
definition a redistribution. Trickle down economics redistributes wealth to the
rich. The result is that the gap between the wealthy and everybody else has
grown tremendously by these policies;
the American dream of upward mobility
is available to fewer people.  The middle class is shrinking.  The poor are
becoming poorer.
 These changes mean less economic activity, fewer jobs, less
money for basic purchases that create the incentives for investment and job
growth, and more people living in poverty in the richest nation in the world.  We
have the resources to eliminate this poverty, but we choose, through economic
policies based on a misguided philosophy and fear tactics that falsely
characterize the alternatives, to maintain and compound these problems.
These charts illustrate the
points made in the last
paragraph above.

The first pie chart in the first
image shows clearly that prior
to the widespread
implementation of trickle down
economic policies in the
Reagan administration, the rich
(shown here as the top 10% of
income earners) received more
of the income gains per person
than everybody else.  This is
consistent with market
incentives for innovation,
investment, and risk-taking
under all market-based
economic schools of thought.  
But the top 10% did not receive
everything: they shared
one-third of all income gains
among 10% of earners; the
lower 90% shared the other
two-thirds.  The rich gained
more, but everybody gained.  
Just as economic theory would
suggest.  By having gains
throughout the different
classes of earners, the
economy could keep moving
ahead with consumption,
investments, savings, and

But over time, under policies
consistent with trickle down
economics, that has all
changed.  The second pie chart
in that first image shows that
the gains have ALL gone to the
top 10%, with the top 1%
receiving most of the gains.  
The bottom 90% has received
NO gains - this group has
actually lost income.  The result
is that the largest segment of
the economy has lost
purchasing power.  The
standard of living for most
Americans has either declined,
or has been maintained only
through borrowing.  Notice that
this chart immediately precedes
the Great Recession, which was
brought on largely due to credit
bubbles.  Without purchasing
power, people will spend less
and save less.  This equates to
less investment, less
production in the economy.
Classical economic theory suggests that this situation would be temporary, because wages would increase to
match the increases in productivity. That simply has not been the case. This is why “trickle down economics”
has failed. These policies have created this situation. Ironically, these policies have been implemented in the
name of ‘free enterprise’. This rhetoric is just that, rhetoric. A close look at the details, the results, and the
assumptions behind the theories used would explain why. In this sense, ‘free enterprise’ means only “giving
the large multi-national corporations what they ask for, even if it hurts everybody else”. It does not create free
markets, it destroys them. Free markets and a stable, growing economy depend on a balance between buyers
and sellers. These policies don’t add to this balance, they take away from it.  They also hurt the small business
owners - what is good for large corporations is not always what is good for small businesses.

The middle class is being destroyed by these policies. An economy as large as the United States requires a
healthy middle class in order to stabilize and grow. The middle class is key to the economy: it comprises the
bulk of the consumers, the bulk of the workers, many of the savers, investors, small business owners, and
entrepreneurship.  The middle class is the section of the economy that encompasses most of the different
segments that need to work together for the success of the economy. It is where the American dream
resides.  The policies that are destroying the middle class include regressive taxes, loopholes for the rich,
and anti-union policies. The issue of labor unions deserves a separate commentary; but in short, due to
asymmetrical information that allows for exploitation, collective bargaining increases, it does not decrease,
the power of free markets to correct for market failures that harm the economy.  Policies designed to
eliminate collective bargaining create market failures that decrease free markets and economic efficiency.

here to see a table showing the “big picture” results of economic policies throughout the history of the
United States. These “big picture” numbers, for the most part, are only available for years beginning in 1913. A
link is provided on the page to the information that is available for years prior to 1913.
Whether the wealthy are actually “earning” this redistribution or not, it is going to happen. The fact that it
happens is not proof that it is somehow “earned”, because the system says it is going to happen anyway. It
always has. Arguing that it is their money that they have “earned” is a classic circular argument [“They
receive it because they earn it.“ “How do you know that they earn it?“ “Because they receive it”].

The rich benefit financially, and directly, from the infrastructure more than the poor do. The rich benefit from
the spending patterns of the poor, through investments. The more money the poor have to spend, the more
money the rich make off of domestic investments. Businesses (and investments) are successful only if the
economy produces enough demand.

But some things have not always occurred, and those are the things that have changed since these “trickle-
down” policies have been implemented. The rich have always gained more than everybody else; but before
1981, everybody tended to gain. When workers’ productivity increased, then workers’ pay tended to increase
also. This benefited the entire economy, keeping money flowing, people earning and spending, and jobs
being created. But since 1981, this has no longer been true. Productivity has skyrocketed, and real wages
have not increased at all. The difference between before and after is the implementation of policies using
“trickle down” assumptions. The entire economy has suffered. The people who would be spending the money
that keeps the economy moving have less of it. Businesses can’t sell, so they don’t produce. Without
production, there are no jobs. Yet, with fewer jobs, productivity continues to skyrocket.
These charts and many similar charts have been circulating around Facebook pages.  They get shared often,
and the information on who originated them sometimes gets lost in the process.  These are sourced in
regards to the data being used, and are consistent with what is known through many sources, including both
private and government sources.  To see more such images, check out the photo albums on the
page for this website.
Here is another situation created by trickle down economics in which the reality doesn't match the rhetoric:  
The idea that "the rich already pay most of the taxes, and the poor don't pay any taxes, so we shouldn't ask the
rich to pay even more".  That is the rhetoric.  Here is the reality: The overall tax code in the United States is
not very progressive by historical standards, or by international standards.  The rich don't pay "most of the
taxes" because the tax rates are high.  They pay most of the INCOME taxes only because they have most of
the income.  Period.  
Their tax rates have decreased over the past 30 or so years, tremendously.  But the
growing income and wealth gaps created by "trickle down" policies have created the situation where fewer
people are paying taxes, more people are receiving tax credits due to poverty.  It isn't HIGHER tax rates on the
rich that are causing the rich to have a higher share of the overall income tax bill - it is actually LOWER tax
rates that are creating this situation.

Besides, the income tax makes up only a portion of the overall tax code.  The other taxes, including Social
Security, Medicare, and sales taxes, are highly regressive.  When viewed together, the United States' tax code
isn't very progressive at all.  The rich also are able to tap into loopholes much more than the poor, including
loopholes created by "trickle down" policies.

Trickle down economics also affects the national debt in ways that are much different from the rhetoric.  This
is an issue that is especially important because it has become a major campaign issue.

The problem with massive long term debt is created entirely by trickle down economics.  This problem began
when Reagan first implemented, on a large scale, trickle down policies.  These policies were partially
reversed during the Clinton administration, and the annual deficits disappeared, leaving behind projected
surpluses to pay down the old long term debt.  But Bush II came along and, in the name of "giving the surplus
back to the people that it belongs to", eliminated the surplus and reinstituted massive long term deficits.  
These surpluses could have been used to help finance the recovery from the upcoming Great Recession,
decreasing the need for more deficits now, but they were long gone by the time the recession hit.

These deficits have continued.  But Obama's policies have NOT created large-scale long term deficits.  On the
contrary, his policies are actually reducing long term deficits, and can get us back to where we were at the
end of the Clinton administration.  You just have to understand the important difference between long term
and short term deficits in order to understand what is going on.  You won't learn this from listening to the
political rhetoric.  This truth is being deliberately hidden from the unsuspecting public.
Long term deficits are created when tax and spend policies create a budget that is not balanced on an
ongoing basis.  These policies are unrelated to the performance of the economy.  Whether the economy is
booming or in recession, these policies will create deficits.  This occurs when tax cuts don't create offsetting
income gains sufficient to increase revenues (and they won't, not when the tax rates are anywhere near what
they are now); when wars are financed by debt; and when spending programs don't increase economic
activity.  These policies, and the resulting deficits, occurred under Reagan and Bush II.

Short term deficits, on the other hand, will decrease long term deficits.  They create a situation in which the
current budget is out of balance, but they decrease the need for future deficit spending.  These are deficits
that are used to offset, and are largely caused by, the effects of a recession.  Many of them aren't even related
to current policy decisions; they are called automatic stabilizers.  The term "stabilizers" is a good descriptive
term for short term deficits.  Automatic stabilizers occur when a recession decreases taxable income
throughout the economy, so that the government's revenue is decreased.  When the recession increases the
need for the government to make transfer payments for unemployment and poverty.  These offset the effects
of the recession by taking less money out of the hands of, and putting more money into the hands of, those
who will need to spend it most.  It means more money will be spent in local grocery stores, etc.  It means more
demand, and fewer lost jobs, than would otherwise have occurred.  This only partially offsets the effects of the
recession, but in bad times every little bit helps.

Much of the widely-talked-about Obama debt is actually from automatic stabilizers, which have nothing to do
with any of Obama's policies.  These are ongoing policies that have been on the books for many years.  The
current focus on them is caused by the fact that the Great Recession hit the economy very, very hard.  This is
a topic for another post, but the recession, which began in December of 2007, had momentum taking us
towards another Great Depression, with no economic forces to stop it, until Obama's policies changed course.
 Once Obama's economic policies started going into effect, the momentum of the recession changed almost
[click here to see a short video showing the basic momentum change created by Obama's
economic policies].  We were able to avoid a Great Depression, at least for now.  There are policy proposals
now that would put us back on that course.  These policies are in the name of "austerity", which is never a
good idea during a down economy.
Which brings us to the topic of short term deficits that are NOT automatic stabilizers.  These are current policy
decisions that increase current deficits; but these are deficits that will disappear once the economy is back on
track.  And the policies are designed to help that transition along, to help reverse the negative economic
trends.  The stimulus package of 2009 is a prime example.  It is this stimulus package that stopped the
downward momentum of the economy in its tracks.  It increased current deficits in two ways; lower revenue
due to tax cuts, and higher payouts due to stimulus spending.  But it prevented long term deficits and bigger
problems that would have occurred if the economy had continued down the same path that it was on.

This graph shows the overall trend in private sector jobs dating back to before the beginning of the Great
Recession.  Notice that the downward trend, with increasing job losses, occurred entirely before any of
Obama's policies went into effect - Obama wasn't even in office during the time that job losses were
increasing.  Once he took office, his policies did not automatically go into effect.  It took some time to put any
policies into effect.  Inauguration occurred in January, the fiscal year didn't begin until October, so we were
still under a Bush budget at the time.  The stimulus package, which was the very first Obama economic policy,
was signed almost immediately after inauguration, but it took a few months for any of its provisions to effect
the economy.  Once they took effect, you can see from the graph that the effect was very positive.  The
direction of the economy turned around almost immediately; the job losses decreased monthly, until they
became job gains.  And we have had private sector job gains ever since.  This graph was created for the
Economics Online Tutor Facebook page in February 2012 using data from  Obama started using a
very similar graph in his television campaign commercials in May 2012.

Of course, we are not back to where we need to be in terms of economic recovery.  Corporate profits are
doing quite well, but the job gains have been slow.  Wages have not improved.  The stimulus helped the
economy, but not as much as needed.  This is absolutely true, the numbers prove it beyond any doubt.  That is,
to anybody who bothers to look at the real picture.  The obvious problem, when the stimulus turned things
around but not by as much as needed, is that the stimulus was too small.  Exactly as predicted by most
"progressive" economists.  Conservative politicians favor policies that move us in the opposite direction of
where we need to go; they have blocked all attempts to stimulate the economy further.  Austerity when the
economy is fragile creates damage.  Growing our way out of the problem is the only way to go: history, basic
economic principles, and common sense all say so.  The above graph shows private sector job gains since
Obama's policies have gone into effect.  What isn't shown is the fact that public sector job losses continue,
due to austerity measures consistent with Republican policies, and these public sector job losses continue to
keep unemployment high, and economic output from being higher.

The current national debt, almost 100% of it, is comprised of the following items: Long term debt that has been
carried over from previous administrations; short term debt created by automatic stabilizers unrelated to
current policies; short term debt created by the stimulus of 2009 and by extensions of unemployment benefits;
and additional long term debt created by decisions relating to wars in the Mideast.

The current Republican campaign position of cutting spending as a solution is a disaster waiting to happen.  It
will solve none of the problems that it claims to address; it will make them worse.  Cutting spending now will
not reduce deficits, it will increase deficits.  This is where understanding the difference between long term
and short term is important.  The rhetoric works because the general population doesn't understand this
distinction, and the advocates aren't about to tell you the truth.  Since the Reagan administration, Republican
policies have increased the long term national debt while Democratic policies have reduced the long term
national debt.  This truth can be found in the historical record; it is not a theory or interpretation.

This is actually a perfect time to invest in the infrastructure as an investment in economic recovery as well as
the future health of the economy.  The idea of cutting spending in a down economy relies entirely on economic
theories that are known to be completely irrelevant to the current situation.  The economy can't grow from
austerity, and the government does not, and can not, crowd out the private economy under circumstances
that exist today.
The truth about the Republican economic position is that it is not designed to stabilize the economy; it
is not designed to grow the economy; and it is not designed to reduce deficits.  It is designed to do
the opposite on all three counts.  It appears, based on an understanding of economic principles and
history, that the debt is being used only as a scapegoat, not as a real reason for such policies.  These
policies are actually designed to take the economy back to the 19th century, to a time when
recessions and even depressions were common, lasted much longer, and the economic upturns did
little more than serve as a recovery from the economic downturns.  But with one important difference:
the additional burden of massive long term debt.
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