Friday, July 15, 2011

Is "trickle down economics" true?

We are having a serious discussion now about our mounting deficit. The divide is about rasing taxes (on the very rich). The Republican argument against this idea is that of trickle down economics. What is it? 

"Trickle-down economics" is a political rhetoric term which refers to the economic policy of across the board tax cuts or benefits to businesses, such as tax breaks, in the belief that this will indirectly benefit the broad population. Proponents of these policies claim that if the top income earners invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals. Proponents argue economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes. However, others have argued that "trickle-down" policies generally do not work and that the trickle-down effect might be very slim.

This is what John Berthoud, president of the Taxpayers Union and professor at George Washington University wrote back in 2006, scarcely a year and a half before the collapse of the economy about the cuts:
Although you would not be able to tell it from the liberal press, the American economy is doing quite well. While there is no single reason behind the strong economy, the Bush tax cuts are a big part of the story. Real Gross Domestic Product has grown by 3% or more for 10 straight quarters. Since May 2003, America has added almost 4.5 million jobs. The stock market continues to move up. The Bush tax cuts have helped the economy by lowering tax disincentives to productive activity. The cuts in taxes on income, dividends, and capital gains have reduced the marginal effective tax rate on capital by 17.4%. This in turn has helped increase investment. As economist Lawrence Kudlow writes: "American businesses, the backbone of our economy, have responded to tax incentives that sharply reduced the cost of capital." (my italics)
Looked in hindsight his assessment of the economy cannot be more out-of-whack. Did Berthoud understand the our 2004-2008 economy was being driven by borrowing from the Chinese?

(Keep reading here).

(I'm closing this post next Thursday at 10pm).