6 January 2015

Trickle-down economics is a Leftist lie


Progressive journalists around the world were united in their approval. Last month’s OECD report, in the words of Britain’s Guardian, “dismissed the concept of trickle-down economics”.

“The OECD report reveals the immensity of the trickle-down scam,” agreed Linda McQuaig on Canada’s Left-wing website, Rabble. Any suggestion that we ought to be appreciative when the rich spent money, wrote Misha Pinkhasov in the Huffington Post, was “a perversion of trickle-down economics that would make even Ronald Reagan’s head spin”.

Leftist politicians echo Leftist writers. In the run-up to the recent New Zealand election, for example, the Labour leader, David Cunliffe, asserted: “The rich are getting much richer, the middle is struggling and the poor are going backwards. It’s the human face of ‘trickle-down economics’, the idea that if we give more to those at the top, eventually things will get better for the rest of us.”

Cunliffe (who went on to lose badly, Kiwi voters evidently not sharing his analysis) was in distinguished company. When he was standing for the presidency in 2008, Barack Obama had similarly excoriated “the economic philosophy [which] says we should give more and more to those with the most and hope that prosperity trickles down to everyone else.”

Nor is it just politicians. Paul Krugman, who has won the Nobel Prize for economics, has railed against trickle-down, as has no less distinguished an economist than J.K. Galbraith, who likened it to “the horse-and-sparrow metaphor, holding that if the horse is fed enough oats, some will pass through to the road for the sparrows.”

The case against trickle-down, then, is pretty clear. But who exactly is making the case for it? Where are the economists, the politicians, the commentators, arguing that we should give more to the rich? Who avers that the best way to stimulate the economy is for plutocrats to have more to spend on their Lamborghinis and swimming pools?

Well, here’s an odd thing: I can’t find anyone. Which is, when you think about it, pretty astonishing. One of the consequences of the Internet has been to ensure that even the most eccentric points of view generally turn out to have some advocates. But my online searches, while turning up hundreds of people debunking trickle-down, have not discovered a single person defending it. Could it be that the whole thing is a socialist fantasy, a false creation proceeding from the heat-oppressed brain of Left-wing polemicists?

In a 2012 paper for the Hoover Institute, the brilliant American writer Thomas Sowell showed that phrase was first used by FDR’s speech writer, Samuel Rosenman, who attacked “the philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.”

In fact, as Amity Shlaes demonstrates in her biography of President Coolidge, Rosenman was offering a grotesque, cartoonish distortion of what had really happened during the 1920s. Coolidge, surely the most underrated of all American presidents, had applied the logic of the Laffer Curve avant la lettre. He could see that the punitive tax-rates levied under the Wilson administration were pushing wealthy people into removing their assets from the productive economy, and believed that, by cutting tax rates, he would boost tax revenues – as well as stimulating the economy in general.

He was absolutely right. In 1921, when Americans earning over $100,000 were expected to pay an eye-watering 73 per cent in federal income tax, they accounted for 30 per cent of a total tax yield of $700 million. By 1929, when the top rate had been cut to 24 percent, the federal government collected more than a billion dollars in income taxes, of which 65 percent came from those earning over $100,000.

It works every time. Reduce the tax rate, and the rich end up paying more in both absolute and proportionate terms. Between 1980 and 2007, the US cut taxes at all income levels. Result? The wealthiest one per cent went from paying 19.5 per cent of all taxes to 40 per cent. In Britain, after the top rate of income tax was lowered in stages from 98 per cent in the late 1970s to 40 per cent by 1988, the share of income tax collected from the wealthiest percentile rose from 14 to 27 per cent.

For the avoidance of doubt, none of the supporters of the Coolidge, Reagan or Thatcher administrations was arguing that society would become wealthier because the rich were spending more. They were arguing – correctly – that tax cuts in general would stimulate the economy.

It’s true that reducing taxes across the board incidentally helps high earners. Because wealthy people pay a disproportionate amount of taxes, almost any lowering, flattening or simplification can be caricatured as a “tax cut for the rich”. But this is a side-effect of a policy that boosts growth rather than the other way around.

What free-marketeers in fact advocate is not trickle-down, but trickle-up. The way to become rich, in a competitive economy, is to offer a service to the broad mass of consumers. I am typing these words using software that I bought from Bill Gates. The transaction enriched him – adding fractionally to his net wealth – but it also enriched me, making my life more convenient. Bill Gates became wealthy, in other words, by persuading a great many poorer people to buy something from him. In doing so, he made us considerably better off, too. Trickle-up, you see.

Trickle-down, by contrast, would represent the precise opposite of an open market system. It would involve handing wads of cash to the undeserving rich in the hope that their affluence would somehow transfer itself to the rest of us. Now such transfers do occasionally happen. The bank bailouts were the most notorious example: they shifted a great deal of money, through coercive taxation, from people on low and medium incomes to wealthy bankers and bondholders. The Common Agricultural Policy is another instance: its cost falls disproportionately on the poor, who spend a relatively high percentage of their income on food, and its benefits go overwhelmingly to big landowners. Likewise the alternative energy boondoggles that force the general population to subsidise those same landowners through higher fuel bills.

Every free-marketeer I know opposes these rackets. We dislike subsidies, whether for the rich or for anyone else. We know that, for all its imperfections, the open economy is the best way to generate wealth across the board. The poor get richer and, yes, the rich do, too. Over time, on average, we all trickle up. I’m still waiting to hear of a better alternative.

Daniel Hannan is a Conservative Member of the European Parliament and blogs at www.hannan.co.uk. His other CapX articles can be found here.