Asta Charles

Asta Charles
Los Angeles, California, USA
December 12
Myth Maker
A foul-mouthed commentator on life, society, politics, pop culture, and economics. I spend a lot of time in bars. I wrote a manuscript about the perils of online dating and its ultimate cost to society. It's not published. Meh.


JUNE 13, 2010 10:56PM

The Loose History of the Trickle Down Theory

Rate: 8 Flag

john_maynard_keynesOn Friday, I had a economic advancement conversation with dear old dad which ended the same way many of our conversations do. With me professing my liberalism and him professing his love for Ronald Reagan (sort of). 

"Eh well, the economy's gonna tank next year, so we're gonna put all our stocks and 401ks in bonds." Announced dad.

This I agree with, because I do not believe that we will see any kind of economic rebound until their is a segment of the economy to grow: which will be manufacturing. That's a completely different I digress.

"I agree, I also think that 10% unemployment is the new normal. Our economy has effectively been reset to what it should have behaved like prior to 1999-2000." I concurred, in my snottish way.

"That's okay though...we'll have a slight improvement when the conservatives get back in office in November."

 Dear old dad doesn't give a shit that I don't agree with him. He speaks of the ideologies I disagree with as if he were talking to himself. I think he takes this tone because it's the only alternative to sounding like he's attacking me. He knows I'm sensitive about my smarts. I'm not very good looking, so it's all i've got.

"When the conservatives get back into office, I'm getting the fuck out of here." I know this isn't a new stance, and it may not come true, but do I ever wish it were financially viable.

"Hah! You're funny." He cackled.

I know some day I'll miss these exchanges, but for now, it leads me to one thing: the Trickle-Down Theory.

Clearly what my dad means about a "slight improvement" in the economy is directly related to knowledge that conservatives will attempt to lower taxes. In 2011, the Bush tax cuts are set to expire and new taxes to pay for health care reform will be put into place. Yes, this will be a little bit painful, but a lot necessary.

Dad, and many other Americans and politicians, believe that zero taxes equal tons of growth. They don't take into consideration what I will call, the Greed Factor.

The wealthy, by definition, have far more than they need. In terms of resort homes, fancy fucking cars, downpayment money, y'know, shit that I will never have because I am "a poor".

I'd like to take this time to mention that my dad is fairly well off. However compared to the wealthiest in this country, who would be responsile for making the Trickle Down Theory work, he is also "a poor".

If the wealthy have, and keep, far more than they need to survive, or even to make them happy, then they are greedy. This is the Greed Factor. This excess would be better off distributed to those of us poors so that we could live our lives without struggle and spend money on luxuries, rather than the bare bones necessities at the 99 Cent Store.

So this set me off thinking: is there any proof that the Trickle Down Theory works? It seems illogical to me, but what do I know. I may be a marketing manager at a very large company but still, I am "a poor".

First, my journey took me to Wikipedia. In 2006, the Pacific Research Institute published the US Economic Freedom Index. The index ranked states according to how friendly their tax policies were to "free enterprise". The study showed that per capital personal income grew 31% fasterin the most "economically free" states than it did in the 15 states that were the least economically free. Employment growth was 216% higher in the most free states. 

Well, this doesn't help my cause all that much. This whole anti-tax thing sounds pretty tasty. Sounds like it's just what Dr. Obama should order, eh?

I still won't drink the Kool-Aid. Yes, because I am ravenously liberal, but also because the city that exists around me dictates that this cannot be true. My peers and I, who make decent money, cannot buy a house. We cannot invest in anything that promises to be a good investment in the future. We barely have enough money to buy cars. If we were to go after these things, with credit (which is unwise) we would be locking ourselves up perpetually in the debtors prison. Our wages will never allow us to pay these things off, if we glomb onto them.

The research by the Pacific Research Institute is the only example I could find of the Trickle Down Theory working as it is supposed to. 

Reagan decreased the tax rate for the richest Americans from 70% to 28% in the early 1980s. This article from the New York Times discusses  why there is no proof that this was helpful. In fact,  it harmed the middle class by widening the wealth gap. Check out these statistics that make me want to go on a murderous rampage in Bel Air:

- The median wage, adjusted for inflation, is now lower than it was in 1980.

-  The top tenth of 1 percent of earners today make about four times as much as in 1980.

- Chief executives in Japan earn less than one-fifth what their American counterparts do and face substantially higher marginal tax rates, Japanese executives do not work shorter hours.

 - In the 1950s, American executives earned far lower salaries and faced substantially higher marginal tax rates than they do today. Yet most of them competed energetically for higher rungs on the corporate ladder.

During the Great Depression, tax rates for the wealthy were raised to 90%. Yet somehow, those bastards survived. 

Why is it that the wealthiest nation in the world can't provide its citizens universal healthcare? Can't provide proper policing in cities that don't generate the most property tax? Is about to lay off teachers if congress doesn't approve an emergency $50 billion? 

The Greed Factor is the reason why.

The average American household makes $60,000 per year.  Depending on the city (assuming it's not San Francisco or New York or Los Angeles) this seems fairly reasonable.  For individuals making, oh let's say, a measly $5 million per year more than this, so a total of $5,060,000, the incremental $5,000,000 isn't technically necessary. 

Even if this hypothetical beast is taxed at 70%, as they were pre-Reagan, they will still have $1,518,000 at their disposal. Gee, must be nice.

But the thought of letting that additional money go is just too much to bear. So painful, that even a potentially bullshit theory is enough to send the rich, and the fearful into a conservative-voting shitfit.

At this point it's appropriate to note that the greatest period of economic growth in American history came before Reagan. Between 1945 and 1973. It was that horrible time when health care was affordable, Americans families could live on single incomes, Americans could afford homes, and unemployment was low. It was the time when the wealthiest of Americans were taxed at 70% and more. It was a time when the Trickle Down Theory hadn't been used as a hope and fear tactic and didn't matter. 

Taxation shouldn't be used as a tool to spur economic growth. Taxation should be even for an extended period of time, and flat for all individuals.  Economic growth should come from the product we create, not hoping that the love of greed will wear off of the rich and all of a sudden they become their own Robin Hood. It's not going to happen. It never has.

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It was really the trickle up theory. Reagan lowered taxes on the wealthy. But the tax burden on the middle class grew. There are now earned income taxes in almost every municipality. Real estate taxes started their steep rise in response to Reagan cutting much of the funding for public schools. The tax cuts were done at the expense of maintaining our infrastructure. As a result, we have crumblind roads, bridges, inadequate water sysytems and an electrical grid that hasn't been updated since the 1950s. WE-the middle class-pay dearly for these tax cuts. They are meant to favor only the wealthy. The other Reagan legacy was gutting college funding of grants-and giving rise to obscene amounts of debt via student loans. The wealthy Reagan friends got even wealthier than they were, they had no risk as the government covered defaults, and this industry exists on the backs of working Americans. You are also right about manufacturing, Walmart is in collusion with China to keep stocked with cheap stuff made in China. The Chinese government subsidizes businesses, therefore American businesses cannot compete.

God help us if conservatives get back into power. I already heard the death knell for the middle class with the Citizen's United ruling by the Supreme Court-you know-the one where corporations are entitled to free speech, at the expense of regular American's free speech!

Rated for your wiseness!
it's not just the greed factor. it's also the constitution. it was designed to protect wealth, and it does. without citizen initiative, you can do nothing.

the prosperity of the post war period was an anomaly. america found itself in possession of 90% of the world's wealth, and the only undamaged manufacturing capability. in combination with the very mild wealth dispersing measures left over from the new deal, this created a golden age which is unlikely to ever reappear.

america now is a second class place, for 90% of its people. it will get worse because the rich see no reason to educate the poor. emigration is the best personal solution.
This is an excellent post with well-founded arguments. The US economy has experienced boom/bust economics since the beginning. It has always been an economy whose prosperity was meant for those who already had the greatest advantage...the laws out written that way. Reagan widened the gap. Everyone seems to forget how many people were unemployed, how many banks went under and how many homes were foreclosed. With each cycle, a meaningful recovery becomes seems further out of reach.
Asta, you are wise beyond your years! Every economic philosophy has a weak link. For Capitalism, it is Greed! If Corporate America could see beyond its proverbial nose ... and wanted to ... it would know this weakness, and loosen up. But Corp. America is only as good as the men (& women) who lead it. If those folks know one thing, it is their own indivdual mortality rate. So they grab all they can, while they can, and it is only when Gov't steps in and forces it that they step to the plate on behald of others ... like employees. That cna be painful. Even so, the pain is temporary. They merely bide their time until they can elect a more suitable (and friendly) governing body. Then it is business as usual.

There is a solution. But it requires participation ... people participation ... plus knowledge, and understanding, and a willingness to work. That's a lot to ask of a class (as in middle) who can barely keep food on the table and pay their mortgage. It is slippery slope that is tough to climb. But it is the only way. The battle has never been about conservatives and liberals, Republicans and Democrats. Since man first settled into tribes, it has been about the Haves and the Have-nots ... people taking advantage of other people. You stop it when you say, "No more!" {{{R}}}
Absolutely no offense taken, don't be silly.
I am 100% in agreement with you. However, I didn't include much of a discussion of manufacturing and what it takes to bring it back to the US because I do think it's a separate, albeit related, issue.

We push paper around. We are a nation of paper pushers and wealth fabricators, but not wealth makers.

I do think this is the root of all ills in the United States. What will take to bring it back, are significant corporate taxes on product importation. Like, to the tune of 70% or more. Or perhaps an additional tax on wages paid to foreign employees.

So, my friend, we are completely on the same page.
Thank you for your comment. It's very hard to see the destruction of an infrastructure from an ivory tower. Despite the fact that it is, a tower.

American businesses have to be forced to compete. I just hope they can afford it. We will have to tax the shit out of the them.

I don't know if China's method of doing business is sustainable. From what I have read, much of their accounting is pretty fuzzy and loans are often given on good faith and records of credit and debt are not kept, or kept very poorly. I suspect that they may be in their own bubble.
@ al loomis:
I think the Canada is the next nation of prosperity for my generation. It sure isn't America.
@Fay Paxton:
I think it's very easy to see the era up until 1999 as a great time of prosperity. Unfortunately it's harder to see that that prosperity really ended, for everyone on a whole, before 1980.
@Rod Emmons:
Thank you so much. You're too kind. :)
Yes, this is about the haves and the have nots. It always has been. Greed is a much more powerful feeling than altruism or utilitarianism, unfortunately.

The middle has to be given the opportunity to work. Like you said, they can't pay a mortgage (or in my case, get a mortgage) without sacrificing something else, how could they possibly start a manufacturing business?

This is a decision that must be incentivized by the government. China must be stopped and taxation imposed on those that use the far east for cheap labor.

Japan always kept their labor domestic. They had their hard times too, but they're still trudging on, and I doubt we will.
@Will Azeperak:
I don't recall...a lot of things happen...but today I bookmarked that link in any case. It is a treasure trove of insight. Thank you.

You are right that China is attached to our economy. But we're also attached to their ability to produce cheap goods since our wages, on average, are too low to pay for American made goods.

Also, (as I commented to another commenter on this blog) I've read that China's accounting, loan, and credit systems are pretty freakin' sketchy. Leading me to believe that they're very vulnerable to a bubble economy.
Trickle-down just leaves everybody all wet. Nice post. B.T.C.