Monday, March 16, 2015

Trickle-Down Economics Redux

The Straw Man Argument is a type of argument that is used to misrepresent someone else's argument, by way of exaggeration or misrepresentation or complete fabrication, with the intention of making the other person's argument easier to attack. It is a dishonest method that almost always undermines rational debate.

As such, almost everyone hates this form of argument. However, many people still resort to this kind of argument on a daily basis – some deliberately, while others unknowingly. And one of the most prominent Straw Man Arguments that have been used so excessively that many people have come to accept the Straw Man as gospel truth is the concept of Trickle-Down Economics.

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It is very easy to find arguments against trickle-down economics.

Senator Elizabeth Warren said that trickle-down economics “devastated U.S. workers while propping up the wealthy.”

Pope Francis pontificated against it, calling it a “a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

(I am not sure if Pope Francis is the right person to talk about naïveté or the idiocy of faith. See here and here.)

Economists have argued against it, too. For example, Paul Krugman said that trickle-down economics is “being nice to the wealthy and cruel to the poor.” And Robert Reich says that it is one of the “big lies” conservatives promise voters.

The OECD released a report that said that “the benefits of growth do not automatically trickle down across society.”

Trickle-down economics has also been attacked and criticized by thinkers, academics, politicians, activists, and journalists in Korea as well (see here, here, here, here, here, and here).

The case against trickle-down economics is clear. It is also clear that it has some very powerful enemies.

Not a friendly face in sight...
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But who actually supports trickle-down economics? Who is actually championing giving more to the rich? The answer is “No one.”

As I already said in a previous post:

Trickle-Down Economics does not actually exist. It is a lie. “Trickle-Down Economics” was a phrase that was devised in the United States in the 1980s when the Democratic Party needed a a catchy zinger to attack President Reagan's economic policy. The phrase was a remarkable political slogan as it painted Reagan and other advocates of tax reduction as sycophants who had all been bought and paid for by greedy billionaires at the expense of the poor and the middle class.

One of the most prolific economists of our time, Thomas Sowell, once challenged anybody “to quote any economist outside of an insane asylum who had ever advocated this “trickle-down” theory.”

To date, no one has ever adequately answered that challenge.

Quoting Thomas Sowell again:

Let’s do something completely unexpected: Let's stop and think. Why would anyone advocate that we “give” something to A in hopes that it would trickle down to B? Why in the world would any sane person not give it to B and cut out the middleman? But all this is moot, because there was no trickle-down theory about giving something to anybody in the first place.

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Those who advocate lower taxes, of which I am one, have never made their case by supporting the idea of transferring wealth from the masses to the rich. Rather, they emphasize the creation of additional wealth and jobs when businesses are not hampered by burdensome regulations and steep taxes.

However, even that is only half of the argument. Those who champion lower taxes do not support lowering taxes only for the rich, but also for everyone else. Crazy as it may sound, no free market capitalist has ever claimed that society would become wealthier because the rich would spend more. Rather, they argue – correctly – that tax cuts in general would stimulate the economy. That is because lowering taxes is based on the idea that if the government lowers taxes, the people – both rich and poor – will have more of their own money and will, therefore, tend to engage in more economic activity.

What is undeniable is that reducing taxes does help the rich more than it helps the poor. However, that is incidental. After all, the rich pay far more than their “fair share” of taxes. Therefore, it becomes all too easy to caricature any tax cut as “tax cuts for the rich.”

Tax cuts might help the rich more, but it also helps the poor. After all, there are only four ways to spend money:

  • Spend your own money on yourself.
  • Spend your own money on somebody else.
  • Spend somebody else’s money on yourself.
  • Spend somebody else’s money on somebody else.

Therefore, the phrases “trickle-down economics” and “tax cuts for the rich” are nothing more than the inventions of a desperate political mind that did not have the ability to debate the merits of an opposing viewpoint. After all, what easier way can there be to “win” a debate than to invent a viewpoint that no one holds, attack that viewpoint, and then claim intellectual victory?

This is not to say that there is no need for a real debate about which policies are needed in order to promote economic growth. With all due respect to Grover Norquist, God knows that lowering marginal tax rates alone is not a panacea (see here and here). That debate is badly needed. Unfortunately, however, demagogues are far too busy trying to slay the imaginary “trickle-down” dragon.

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  1. You must not be talking about the US where different "types" of income are taxed at different rates.

    1. Hi, TT. Been a while. If you are referring to my phrase "the rich pay far more than their “fair share” of taxes," the fact that different types of incomes are taxed at different rates does not change the fact that the rich still pay more in taxes than everyone else.

  2. Just wondering what the Kool Aide tastes like that's all. I know the hangover hurts like hell.

    1. Seeing how you have not challenged me about whether or not trickle-down economics or the overall taxation borne by “the rich,” I will assume that you have acquiesced those points.

      Now, I typically don't respond to articles from Alternet. The thing is, I only occasionally read that site for the same reason that some progressives listen to Rush Limbaugh. Occasionally, I really need to hate laugh (that's a thing right?) as that site tends to be chock full of fallacies, mistakes, distortions, fabrications, and baseless claims. However, seeing how we have a history of correspondence, I will take the time to respond to the link you posted. Seeing how you posted a very long link, this will be a really long reply.

      “Despite the practical failures of free-market economics, too many mainstream economists have continued to embrace simplistic ideas about how the economy works.”
      What failures of free-market economics is he referring to? What was free-market about Fannie Mae and Freddie Mac? What was free-market about the Community Reinvestment Act or the Department of Housing and Urban Development or the TARP bailouts or the Federal Reserve or the minimum wage mandates or the myriad of other government regulations on the economy? What evidence is there for deregulation? Are there more regulations that exist today than there were twenty or thirty years ago? This man never once mentions the number of aggregate regulations that have increased since the Reagan years despite the supposedly destabilizing nature of deregulation.

      So I suppose what I'm saying is that if he is going to make such blanket statement, a little evidence might go a long way, which he seems to have done everything to avoid having to give.

      “They favor letting markets set wages without many safeguards for workers, even when the result proves neither equitable nor efficient.”
      Are free-market economists in favor of no safeguards at all or are we merely against government safety nets, which we believe have more costs than benefits? Believe it or not, these two positions are not one and the same. He does not seem to realize that.

      “The consensus in the profession is that widening inequality must be the result of deficiencies in the skills of the workforce, rather than the result of structural disadvantages inadequately addressed by government.”
      Says who? No intelligent economist that I know of. It doesn't take a Nobel-laureate to figure out that there are more college graduates today than there were twenty or thirty years ago. But a lot of them are still flipping burgers or unemployed or undermployed. So there is no evidence whatsoever to claim that there are deficiencies in the skills of the workforce. Again, this man is proving to be an expert of making straw man arguments.

    2. “Why, for example, do so many economists oppose increases in the minimum wage? Over the past 10 to 15 years, empirical evidence began to show that an increase in the minimum wage in many communities did not result in more than a trivial number of lost jobs and may have actually resulted in more jobs, as demand for goods and services increased with higher purchasing power.”
      Why do we oppose increases to the minimum wage? Well, for one thing:

      And for another, I love how he says “did not result in more than a trivial number of lost job.” As many people who oppose minimum wage laws have been saying for years, those laws make the least employable people – ethnic minorities, teenagers, unwed single mothers, parolees, disabled people – less employable. Does he think those people losing their jobs is trivial?

      I also love how he doesn't cite evidence. Where is his empirical evidence? I don't know if he will ever provide one but while we all wait, here is some empirical evidence that shows that minimum wage legislation DOES result in more than a trivial number of lost jobs:

      “The claim that unequal education and skills explain unequal wages is an invisible-hand argument. If people with more education are better qualified, the market will justifiably pay them better.”
      I already countered this. He's just making one straw man argument after another, isn't he? Well, might as well double down, I suppose.

      “In a nation of fewer opportunities, whom you know and what social skills you have become an entrée to a job, not learned skills.”
      Does America really have fewer opportunities today? If we look at it from the perspective of traditional markets like manufacturing, definitely. But what about the new markets? Not a word about the sharing economy. It's like I can make blanket statements and not have to be called out on it. Who would have thought that you could just do that and have people flock to you for your wisdom?

      “Closely related to this proposition is another assumed accounting identity—the claim that savings equal investment. This is true only retrospectively, but too many still accept the proposition that more savings will generate more investment. With more savings, the price of investment—the interest rate—will fall; due to the invisible hand, business will invest more. Not so, said Keynes. If more savings come at the expense of more buying, investment will likely fall, especially in a weak economy.”
      With all due respect to Lord Keynes, savings isn't “negative.” It is deferred consumption. By setting aside some resources for meeting financial consumption needs, we invest them. This sheds light on current events in Japan, where the high savings rate that has ranged between 15 percent and 20 percent is blamed for the economic slump. What is happening in Japan is not the result of "too much saving," as suggested by many experts, but rather of too many loose fiscal and monetary policies that continue to destroy households' savings. The misguided policy of lowering interest rates to almost nil is a major catalyst behind the destruction of real savings. The same applies in Korea. From 1997 to 2004, people did a great job with saving their money. But since then, due to loose monetary policies that forced interest rates to be a little over 2% (it's less than that now), people were disincentivized from saving, which has done what for the economy exactly?

    3. “Yet simplistic ideas about deficit-reduction as cure-all dominate the profession. They seep into the public consciousness and are not easy to reverse, especially when both Democratic and Republican economists and presidents have advocated them at one time or other. Keynes defeated Say’s Law only temporarily.”
      So, is he criticizing free-market economists or is he criticizing politicians who have dumbed down economics to something stupid that the general population can understand? Case in point, I also brought up the topic of the silliness of equating deficit reduction as the true means of “fixing” an economy:

      “But financial deregulation, which began in the 1970s and was reinforced by Reagan and Clinton, led directly to the subprime bubble and the 2008 collapse.”
      Again, where is the evidence for all this deregulation? Again, I ask – Compared to the 1970s to the present day, are there more regulations today or are there less today? Honestly answer that question first. No one who ever talks about regulations ever seems to want to answer that question.

      “Inflation Targeting and Price Stability Are Holy.”
      Is he criticizing free-market economists? Or is he criticizing mainstream economists? I ask because they are not the same thing.

      And what is a mainstream economist? Earlier he said some economists have gone against the mainstream and have even earned Nobel prizes. Two such economists who fit that bill come to mind – Joseph Stiglitz and Paul Krugman. So they are obviously not mainstream economists because they are outnumbered by the traditional free-market economists?

      Then I have to ask, who is really mainstream? Those who are in the larger camp but whose voices are not heeded, or those two economists who have the ear of the President of the United States and members of Congress?

      A lot of free-market economists have been trying to demolish the Federal Reserve. Other mainstream economists, like Paul Krugman who has the ear of the president, has been defending the Federal Reserve and any has been poo-pooing any attempt at currency competition (such as Bitcoin as libertarian fantasies). So again, who is really mainstream?

      “One-size-fits-all policies should be adopted everywhere, no matter the developmental stage, educational attainment, or culture of a nation.”
      Um... which free trade agreement is he saying are one-size-fit-all policies? Is he saying that bilateral free trade agreements between the US and Korea and the one between the US and Singapore are somehow the same? I've got an army of lawyers and economists who might have a thing or two to say about that.

      “But the Washington Consensus badly failed in the 1997 East Asian financial crisis.”
      Did the policy fail or did overheated Asian economies fail?

      “Yet simple free-trade agreements are still backed aggressively by many economists.”
      Calling free-trade agreements simple shows how little he knows about them.

    4. “First, nations need space to develop their own industries and institutions. This might require subsidies and other supports that violate trade agreements. Second, free trade should be adopted gradually—no shock therapies, please.”
      All right, Naomi Klein. It's amazing how countries like Singapore and Hong Kong saw their economies soar despite the near absence of trade protectionism. Or if those countries are too small, we can look at India and China. When these two countries were still pursuing socialist economic policies, their economies stagnated and in China, millions died. After they finally began to liberalize their economies, they have positioned themselves to become the biggest economies of the world in the next ten to twenty years.

      “Mainstream economics has no strong theory of government, except that it is a corrector of market failures (which are presumed to be rare). We might call this a negative theory. The Fed can intervene to save the economy from collapse. Or anti-trust authorities can make sure markets are competitive (which they don’t do much of these days). Governments are also supposed to fill the hole for social goods that markets don’t provide, like highways and schools and clean air and water.”

      The Fed can save the economy? Has he not heard of well any conservative economist since the 1960s who has been saying that the Fed is a horrible thing?

      Markets don't provide roads?
      Markets don't provide schools?;
      Markets don't provide clean air or water?

      “Today, fears of a big federal deficit block adequate government investment. But the nation won’t grow without more government. The dominance of bad mainstream thinking, which leads to resistance to public investment, has been especially damaging because it undermines the foundation of future prosperity.”
      Where is his evidence that government investments lead to economic growth? I have evidence that says otherwise:;;;

      “The authority it provides economics is a false one because there are many immeasurable frictions that keep the invisible hand from producing the best outcome for all.”
      Has there ever been a free-market economist who has ever said that the free market would produce the best outcome for all? Sure, I've heard “most opportunities for as many people as possible,” but that's quite a long way off.

      “We don’t even know how the magic price where the supply and demand curves allegedly meet is arrived at.”
      No, no one knows that. Because there is no such thing as the equilibrium price. It's a theory that is taught in Economics 101 to emphasize the supply and demand curves, but in reality, that price is always constantly moving. Did he only just now realize that?

    5. “Another reason mainstream economics retains its magnetic hold is that it provides a safe basis for career advancement in academic institutions.”
      I dearly wish this were true. If I could get a job at AEI or FEE, life would be grand.

      “Mathematical methodologies can be evaluated. These are often complex and sometimes brilliant, but they are based on foundations that may not relate to the real world. Contradictions in outcomes of economic research are ignored, because the evaluation is of methods, not outcomes. This is hardly science.”
      Has anyone ever claimed that economics was an exact science, much less a pure science? You'd think that there is only so many times someone can make a straw man.

      “On the other hand, Joseph Schumpeter, who was also an old-fashioned narrative economist, is still heralded because he was basically a conservative.”
      This statement alone goes to show just how little he knows about economics. Schumpeter was not a conservative. He was a liberal in the true sense of the word. Also, it's impossible not to hold him in high esteem considering the volume of work he produced. John Kenneth Galbraith is certainly a respectable economist (one that I don't particularly agree with) but he is no Schumpeter.

      “To win the ears of government officials and the public, economists not coincidentally fit their theories to the new elite attitudes in America. Believing that markets solved social problems and that expensive social programs did not was music to the ears of business and right-wing politicians.”
      Really? So there was no pro-market economics before 1970? So, no Murray Rothbard or Henry Hazlitt or Ludwig von Mises or FA Hayek? It was just to get some of that sweet government aid.

      It's quite amazing how he is able to say so much but not provide any evidence whatsoever.

  3. John. You know I don't have a degree in economics like you do. All I see are the results of more than 30 years of whatever the fuck you call this economic model we've been using.

    1. Sure, I get that. And no one is saying that there is nothing wrong with the economy. I am a free market capitalist. That doesn't make me delusional.

      But the economic system we've had the past 50 years has hardly been a free market economy, as the writer you quoted suggests.

      The real problem with economics, and this is something that every economist will agree with, is that it simply cannot be divorced from politics. That is because no matter how objective economists may try to be, it is the job of the politician to sell the idea to voters. Seeing how politicians have their own interests and so do the people, economists' ideas are changed into something unrecognizable, and, more often that not, made worse.

  4. So is there anything wrong with saying that economics isn't an actual "science", or that "careerism" might play a part as well?

    1. We have to be careful with language. What do you mean that it is not an "actual" science? The definition of "science" is "the intellectual and practical activity encompassing the systematic study of the structure and behavior of the physical and natural world through observation and experiment."

      If that is the definition we're going with, then microeconomics is certainly a science. There are hundreds of experiments going on at any given time. For proof, check here:

      Macroeconomics is not as well researched as microeconomics but that is because it is stymied by a lack of data (we have perhaps 50 years of macroeconomic data for about 12 countries) and there is a limited number of exogenous shocks. Also, it is impossible to have a control experiment in macroeconomics.

      However, although economics is certainly a science, no one has ever claimed that economics is an EXACT science. For one thing, economics constantly has to deal with human variables. If chemists had to deal with human variables a fraction of the times that economists have to deal with, we'd all be calling them alchemists again.

      As for "careerism," is there a single line of work where that does not come into play? I think you once said that you used to be involved in union work. If you had walked into one of those union meetings and then said "hey, maybe asking for too much money from management might backfire because the business is facing a lot of stiff competition from overseas competition," you would have been right, but you would not have been welcome at those meetings anymore.

      In the case of economics, does it play a role? Undoubtedly. But does that play a major role? Unlikely. There are competing factors - individual interests, political bias, confirmation bias, etc. However, the differences between economists, as huge as they may appear, are closer to one another than the differences between economists in general and the Average Joe. Like I said, economics IS a science, albeit not an exact one. So, although there is room for disagreement, the science of it makes complete polar differences unlikely to happen.

      Well, it can happen, but one of those economists would be very wrong; case in point, Karl Marx.

    2. Actually I did often point out that a LOT of the things the union was doing might be counter productive. I'm in a public sector job and we cannot strike so robust negotiations are always a key component to the strategy. We've certainly been asked to make sacrifices along the way and when it was reasonable and met long term goals we compromised. Obviously being in a public sector union is very different than private for various reasons. One being that politics, local and national play a heavy role. When you work in a public sector union often a lot of your time is taken up just hanging on to what you've already got. Every election cycle has the potential to present challenges. Politicians are rarely focused on the actual future and are governed by what they can accomplish during their term. If they are hostile toward unions, which most of them are these days, then much of your time is spent fending off attacks that are often nothing more than political posturing.