The Myth of ‘Trickle-Down Economics’ | Eastern North Carolina Now

    Publisher's note: This post, by Brian Balfour, was originally published in the Economy section(s) of Civitas's online edition.

    Pop quiz: what do you do when you are a politician who finds himself incapable of debating the merits of an opposing viewpoint? Answer: invent a viewpoint no one holds, critique that viewpoint, and claim intellectual victory.

    That's what happens when politicians talk about "trickle-down economics"  -  when in fact the truth is exactly the opposite of what liberals think it is.

    Case in point: Then-candidate Barack Obama repeatedly featured "trickle-down" economic theory as a villain in several campaign ads during the 2008 campaign, insisting that "the old trickle-down theory has failed us." Obama claimed the theory "says we should give more and more to those with the most and hope that prosperity trickles down to everyone else," and has added the theory hinges on "just a few folks at the top doing well, hoping that it's going to trickle down to working people."

    Obama's attacks on trickle-down economics have continued for years, most recently with the President echoing Pope Francis' condemnation of said trickle-down theory.

    One small problem: Such a theory does not, nor ever has, existed.

    As economist Thomas Sowell noted in his book Basic Economics, "'Trickle down' has been a characterization and rejection of what somebody else supposedly believed." But "no recognized economist of any school of thought has ever had any such theory or made any such proposal. It is a straw man. It cannot be found in even the most voluminous and learned histories of economic theories."

    Here the President and like-minded progressive statists employ an avoidance tactic to evade confronting the actual arguments presented by those who advocate for lower tax rates and less government interference as ways to grow the economy. Such advocates clearly do not make their case by seeking a transfer of existing wealth to high-income earners and business owners (i.e. "give more to those who have the most"). Rather, they emphasize the creation of additional wealth and jobs when entrepreneurs are not hampered by heavy regulation and discouraged by steep taxes, Sowell writes.

    One can quibble with the merits of such an argument, but inventing a non-existing 'trickle-down' theory distracts from the issue at hand.

    Indeed, even the imagination needed to conjure up the caricature of a 'trickle-down' theory exposes a fatal flaw in the economic reasoning of those inventing it. As Sowell wrote, "Economic processes work in the directly opposite way from that depicted by those who imagine that profits first benefit business owners and that benefits only belatedly trickle down to workers."

    As almost any entrepreneur  -  big or small  -  can tell you, when a business investment is made it is the workers who get paid first. Profits and capital gains only come later. For instance, when a new restaurant opens up, construction workers and interior designers get paid for building or renovating the space. Companies make money providing the furnishings and kitchen equipment. The wait staff, cooks and cleaning crew receive regular paychecks for doing their work. Furthermore, the food and beverage suppliers likewise get paid. Only later, if the restaurant is successful, do the owners see a return on their investment.

    Even hugely successful corporations can often take years to break even. For instance, Amazon began in 1995 but didn't turn its first profit until six years later after sustaining billions in losses. All that time, its workers and suppliers kept collecting checks.

    As Sowell put it, "In short, the sequence of payments is directly opposite of what is assumed by those who talk about a 'trickle down' theory. The workers must be paid first and then the profits flow upward later  -  if at all."

    Such a woeful misunderstanding of the sequential process of business investment and job creation leads to confused thinking  -  even in the thinking behind the creation of a straw man. Such confusion leads progressives like Obama to lobby for progressive tax rates, which punish the prospect of future profits, thereby reducing current investments that create current jobs.

    There is a real debate to be had over the best public policies to promote economic growth. Unfortunately, the President and many progressives aren't interested in participating. Instead, they would rather slay the imaginary "trickle-down" dragon. Since their understanding of the economy is exactly backwards, we shouldn't be surprised when liberal economics bring not prosperity but economic misery.