The deadline for the manuscript of Zombie Economics (last complete draft here) is only a few weeks away, and the zombies are popping up faster than I can knock them down. I’m adding a section on reanimated zombies to each chapter. Over the fold is the social mobility defense of trickle down economics, as animated by Thomas Sowell. There’s still time for me to benefit from your comments.
A good zombie movie needs a sequel, and so, it is almost inevitable that some zombies will survive to carry on the tradition. The best candidate for zombie immortality is probably the trickle-down hypothesis. As we’ve seen it can be traced back, under that name, at least to the early 20th century. But as long as there have been rich and poor people, or powerful and powerless people, there has been a market for advocates to explain that it’s better for everyone if things stay that way.
The hymn ‘All things bright and beautiful’, one of the favorites in the hymnbook of my youth is, for the most part a paean to the beauties of creation. But, the real message comes in the verse ‘The rich man in his castle, the poor man at his gate, God made them high and lowly, and ordered their estate’. And the same message is contained in Aesop’s fable, about the tail of the snake that foolishly rebelled against its natural master, the head, with dire consequences.
With such a long pedigree, trickle down economics is unlikely to be killed. Still, given the overwhelming evidence that social mobility in the US is both low by the standards of developed countries and decreasing steadily, the task of reanimating this zombie idea looks like a difficult one. But Thomas Sowell of the Hoover Institute is up to the job.
In his latest book, Intellectuals and Society, Sowell excoriates liberals for their misunderstanding of economics and sweeps aside concerns about declining social mobility with the assertion that, ‘neighborhoods may remain the home of poor people for generations, no matter how many people from the neighborhoods move out to a better life as they move up from one income bracket to another.’ He immediately contradicts himself with the observation that Harlem was formerly a middle-class Jewish community, and appears unaware of the recent (re)gentrification process in which blacks have again become a minority group in greater Harlem. http://www.nytimes.com/2010/01/06/nyregion/06harlem.html
This insouciant attitude to evidence is unsurprising. In earlier writing on the topic, Sowell made the observation that ‘ If mobility is defined as being free to move, then we can all have the same mobility, even if some end up moving faster than others and some of the others do not move at all. ’
In fact, on Sowell’s account, the US would remain the world’s most socially mobile society even if everyone ended up in the exact same social position as their parents.
As Sowell astutely observes ‘A car capable of going 100 miles an hour can sit in a garage all year long without moving. But that does not mean that it has no mobility.’ If the poor don’t succeed, he says, its because they are not willing to make the necessary efforts and sacrificies
Translating to the real world question, if we observe one set of children born into a wealthy family, with parents willing and able to provide high-quality schooling and ‘legacy’ admission to the Ivy League universities they attended, and another whose parents struggled to put food on the table, we should not be concerned that members of the first group almost invariably do better. After all, some people from very disadvantaged backgrounds achieve success. and there was no law preventing the rest from doing so.
Clearly, an idea so appealing to people who can afford to reward its promulgators is unlikely to be killed by mere evidence of its falsehood. Perhaps if the political left is willing to return to class politics (something the rightwing advocates of trickle down have never abandoned) it might, at least find a way to drive this zombie idea out of the assumed knowledge of political debate.
John Quiggin 
I am an avid reader of your blog John, but have not been moved to comment until now. (So this being a maiden comment, please excuse my naivety, shrill commentariat.;) )
I like what I have read of Zombie Economics and perhaps in a related vein, Akerlof and Schillers’ book on Animal Spirits.
What I am somewhat confused about is what this all means for what government or other social groups should do (rather than what they should not). Perhaps some kind of summing up on where this is all heading for economists’ view(s) of markets. You are arguing presumably that the Adam Smith kind of invisible hand either never existed or is far from being the perfect arbiter but I also presume that you (still?) find markets useful? Just not as efficient as they could be with the visible hand of government giving it a nudge (shove?) here and a check there?
So, is there any literature out there along these lines – with conclusions on when government should regulate various markets (or not) or when it should supply products and services directly (or not)?
@John Street
First you have to re-educate Treasury Depts at State and Federal level John.
This isnt easy (take Roozendahl for example…a man on a mission to make mistakes). Its the ratchet effect of government. Once policy manuals get written into the bureacratic instructions it takes a crisis to get them to fly straight again. Plus: the paperwork is still circulating from JHs productivity commission and the appointments made from the mathematically literate but socially and economically illiterate are still there worshipping Fama’s models…and their own versions.
The deadwood is still in there John. Now we need the ant powder to disrupt their normal processes and make them take a different direction to rebuild the organisation. The GFC was part of teh ant powder we needed…they wont see the errors in policy on their own without a shock to the system. We dont want Pol Pot here but we certainly dont need Gengis Khan either which is what we have been getting.
Its a slow process.
I think social mobility is a good thing to see in a society. However I have never generally regarded trickle down as being about social mobility. Rather I have understood it to mean that when the rich profitably invest their capital the great bulk of society becomes more prospereous. And that in a world where investments entail risks the rich care about the return on their capital. Of course a large middle class and a strong financial system mean that we are generally much less dependent on the capital of the super rich. We are still dependent on the capital of the well off.
Looking forward to your finished book. In the vein of extending the work to finish it, have you read the book “First as Tragedy, Then as Farce”, by Slavoj Zizek, and if so, what do you think of it? I only found a copy today so I haven’t read it all; however, he is attacking – unapologetically – the ideologies present in the first decade of this millenium. He is leftwing, no doubt about that.
The blurb on the back describes it thus:
Regards,
Don.
There will always be rich people, and there will always be poor people. And there will always be some subset of poor people who will not take advantages of opportunities to advance themselves. However, what I find absolutely unconscionable are policies and practices that actively impede the ability of poor people to improve their lot, and America is one of the worst countries in the world in this regard because of how it structures and funds education.
In the modern economy a good education is they key to economic success. The US system of having K-12 education be provided by local school districts that are funded by property taxes is optimized to ensure that the children of the affluent get better educations than the children of the poor, thereby shielding the children of the affluent from competition in life and helping to preserve their advantage. To me that is just tacky.
All this to say, trickle down economics wouldn’t be so bad if society would at least drop policies and practices designed to restrict social mobility.
I don’t think the “shielding the children of the affluent from competition in life” argument carries much weight but I do think the insight about education being linked to property taxes is interesting.
I have a problem with 2 basic assumptions of trickle-down, 1) income is a reasonable measure of work and abilities, and 2) the rich create jobs.
The first one seems obviously false on its face, different professionals have wildly different levels of compensation even after adjusting the amount of work required and/or the level of training and education required. Clearly, many of the worst paid jobs require the most physically strenuous labor (factory , and many of the most emotionally taxing jobs (social worker, nurse, police officer, firefighter, teacher), are relatively poorly paid compared to something like finance. Some jobs that take huge amount of education and training (college professor, scientist) have only average salaries. And clearly there is no relationship between income and value to society, if there were wall street bankers would be paying us.
Since I am not an economist, I can’t directly address number 2, but it seems to me that the days when rich capitalists in top hats self-funded all factory construction are over. The rich seem more likely to spend there money on buying yachts, rolexes, and hiring Aerosmith to play at there daughters 16th birthday. This seems to be a far cry from the kind of productive uses that their tax dollars could otherwise be used for and a poor justification for taxing the middle class at a higher rate than the very rich as is currently the case (capital gains for rich- income, sales, and payroll taxes for the middle class).
Alex,
You’re making a straw man argument. The assumptions that you enumerate are not the basis for trickle down. Refuting those assumptions is trivial but irrelevant. You may as well have said you have a problem with two basic assumptions of trickle down which are that 1) the moon is hollow, 2) oxygen is a solid at room temperature.
@Donald Oats
Don – you say
“Billions of dollars have been hastily poured into the global banking system in a frantic attempt at financial stabilization. So why has it not been possible to bring the same forces to bear in addressing world poverty and environmental crisis?”
Not only that Don we could ask the question “why hasnt billions of dollars been poured into nation and infrastructure building or rebuilding as is now desperately needed in many parts of the US and other so called “advanced industrial nations.”
If you watched the history channel last night it would have alarmed you as to the state of the US road system, bridges, water supply infrastructure and so on. Much of the “nation building” went on in the 30s and forties and before and is now carrying numbers it was never intended to carry at the end of its useful life. While US infrastructure degrades to the point of collapse – and bridges are collapsing – it absolutely astonishes me that the US govt, using taxpayers monies can find enormous amounts of money to prop up a few glistening wall street banks.
Thats business as usual but it isnt economically useful as a long term stimulus is it? The US glory days are over and lest we go down the same road we need to get back to the business of building infrastructure and creating real jobs, rather than throwing billions at the black hole monoliths of wall street.
The mentality that trickle down will provide this vital essential infrastructure and create those useful jobs that will prevent poverty and also prevent environmental crises has proved not only false but dangerous and destructive – (Think about the degraded sewerage systems and dams and levy systems in danger of collapse in the US now).
The US inherited the infrastructure that made it such a great economy. Yet it was the creation of prior generations that were not Keynesians and had no objection to the Keynesian ideas of government stimulus because Keynes had not yet even written about it.
Yet they still chose to build and made the nation wealthy.
Thirty or forty years now of trickle down ideas and the neglect it has brought with it – the US has deliberately wasted its inheritance.
So Thatcher was wrong when she removed the 90% tax on investment income?
@Alice
Just to clarify: the quote I gave is from the back of the bookcover, they are not my words.
Yeah, I saw the doco on Infrastructure in America a few days ago. It demonstrates that the USA is living too much in the present as concerns its infrastructure, whereas those responsible for the earliest infrastructure really did look to the future in their planning. Living off the back of prior good planning and investment “worked” for a while, but it is right to call this activity by its nature, ie neglect, for that is certainly what it is. I agree with you on that one, Alice.
Since we have followed the same course we have similar problems developing. As a classic example of risk analysis versus profit motive, look at the Nouth-South rail from NT to SA. Does anyone know whether historic flood data was taken into account in the planning, especially design decisions? It is possible that the risk analysis includes the impact of future down-time as rail tracks are damaged and repaired, but I somehow I doubt it. Future economic impacts caused by “single point of failure” on a single track, while difficult to ascertain, could at least have revealed that other design options should be explored before committing to a single ground level track through lower lying regions.
Did anyone consider elevation costs vs economic costs of flooding, etc? Or options like building two, not one set of tracks but running along different ground, in order to reduce SPOF issues related to train derailment etc? Sidings aren’t enough as has already been demonstrated by derailment and train failure events blocking the other traffic.
Back to topic: “trickle-down economics” apparently claims that no one has used this term (explicitly) in the Reagan or Bush administrations, so it is wrong to claim that those administrations adhered to the notion as a policy principle. Whether this is true or not I am unable to say; however, I think the “tax cuts for the rich” used so amusingly in a series of Doonesbury cartoons during the Bush Jr administration really nailed it. No matter what question was put to the president – in Doonesbury – the reply from Turdblossom (Rove) and/or the President was “Tax cuts for the Rich!”
Then there is Galbraith’s historical reference to earlier versions of “trickle-down economics” – the so called “horse and sparrow” effect in the 1890s. I believe the idea was that if you feed oats to the horse, eventually it makes its way onto the road for the sparrow. Galbraith sure knew how to nail it.
I have heard Galbraith referrred to as the poster boy of economics.
He was no pretty poster and nor was he a boy. He was an observant economist who wasnt afraid to take on the shadow boxers in this game and he did know how to nail it Don.
The horse and oats analogy is a particularly good one…except that a few decades after Galbraith said this about trickle down… the horse’s contribution may not even make it on to a working road but instead lands in a puddle of mud in a pothole.
You say that “the overwhelming that social mobility in the US is both low by the standards of developed countries and decreasing steadily”.
Peter, I would prefer to say social molbility “may decrease steadily”. The evidence is inconslusive.
@Donald Oats
Oops. The first sentence in the second last paragraph should say:
Sorry, I should have said “John”.
Very relevent, I think, come 2 articles from The Oil Drum:
http://www.yesmagazine.org/happiness/want-the-good-life-your-neighbors-need-it-too wealth distribution
http://www.theoildrum.com/node/6209 Dennis Meadows…growth versus development
Thank you for treating me so gently Alice. I agree absolutely. A bit of re-education never hurt anyone. Perhaps, to encourage the others, there could be a compulsory anti-zombie economics gulag for the recalcitrants.
But on reflection, what I am really asking is not that hoary chestnut: “What are the policy implications?” I am asking: Is there some new efficiency theory to replace EMH?
Or did economists have it right before EMH was thought of? In which case we have not progressed at all and could simply resurrect some older economists/treasury officials.
Oops, there might be some zombies.
@Alice
Good question John Street.
The trickle down argument is not completely spurious. But it’s not a scientific question, it is an engineering question. In the last couple of decades, the global economic system has been engineered to allow the world’s Rich to withdraw capital from any part of the world at a moments notice. Open capital markets combined with free floating currencies vest global and local elites with the power to sabotage a country’s economy if it’s in their interests. This extra-political seat of power constrains policy-makers to make certain that nothing is done in the way of even a modest redistribution of wealth for fear of capital flight that would derange commerce and industry. Employment of people and resources takes place when are where private capital sees fit. “Trickle down” is not some natural law describing how everyone benefits when the Rich are richer (since such a “law” is obviously false and nobody ever believed it except useful idiots). “Trickle down” is actually the Rich telling everyone else, “Do as we say or everyone suffers”.
@John Street
John – I dont know how you cure them. The electorate tries and tries to vote for people who are going to “fix” the social infrastructure capital …and they all promise to “get the trains running on time” and hurl abuse at each other when in opposition for not “doing it” …but when they get elected = life goes on as normal and so do the disastrous privatisations and infrastructure neglect.
I no longer know how voters get what they want…instead of getting what they dont want every three or four years.
Its got me beat..and when heads of schools have been promoting the EMH followers and the mathematically literate and castigating as lefties the socially literate or responsible economists that can actually look up from a mathematical model occasionally at what is actually going on around them in the real world…
Really – all I can think of its yet another major catastrophe (how many more do we need?)
I think they call it organisational and social disintegration John.
Its happening. I dont know why – have we become too disparate to manage? Are there too many of us? Is politics a game people play to advance their own self interest? (look at some nations with larger populations where politics descends into farce and corruption). Give it another 15 or 20 years and country towns are looking good for somewhere to live.
We used to have half way decent public processes and systems in this country, which everyone took for granted that they would exist forever until the mealy mouthed right wing arrived in both parties, at the lure of businesses who didnt want to pay much tax (when do they ever) and flogged the clever systems we had off.
Those idiots dont know what they are missing (some are simply too young and silly and dont know any better than to follow talking point remedies pushed by the new gen of libs) but I can recall it.
I never suggested any re-education gulags John. Thats a bit of a wide of the mark interpretation that didnt escape my attention.
Next time I wont be quite so gentle….
Gerard how do you withdraw a mine or a port or a phone company or a factory from any part of the world at a moments notice? For instance how do the owners of Optus withdraw their capital from Australia at a moments notice? I think you’re barking at the wind.
Financial capital can be withdrawn by moving it from one place to another. Physical capital is not mobile and can only be “withdrawn” from the economy when its owners let it sit idle or operate at a limited capacity, or not invest in its maintenance or growth. But since in a credit-based economy businesses can’t survive very long without liquidity, withdrawal of financial capital can sabotage the operations of physical capital, even where the physical capital could work perfectly well.
Also, the first post here mentioned Adam Smith. Well in Smith’s time, “capital” generally meant things like a mine or a factory. Today “capital” means the amount of money that can a company (owner of a mine or a factory) can raise by issuing debt or equity based on expectations of that company’s putative future earning capacity
In essence you are saying that the current arrangements allow investors to stop investing and lenders to stop lending. What do you propose as an alternative? That investors be forced to keep on investing and lenders be forced to keep on lending even when it isn’t in their interest to do so?
If I were to propose an alternative I wouldn’t waste my time by proposing it to you. I’m only making the point that the “Trickle Down” argument is not completely wrong. It is valid in the sense that the current institutional arrangements do allow the ruling class to punish society at large if they don’t get what they want. Even policy-makers who genuinely want to help the poor are forced to put the sensibilities of the rich first.
That seems a bit unfriendly but okay. It is your time after all.
No argument from me on that point.
I don’t mean to be unfriendly, but your emotional devotion to whatever you regard as “capitalism” is so deep you’re obviously not going to be responsive to any alternative that I or anybody could possibly propose.
Maybe, maybe not.
Terje: ” I don’t think the ‘shielding the children of the affluent from competition in life’ argument carries much weight…”
This pearl nonchalantly dropped, has me puzzled. If it (“shielding”) doesn’t work, why do the parents of rich kids keep turning up in their beamers and fourwheel drives outside of expensive private schools (usually trying to run over any bystander crossing the road, in the process!)?
Alex says the rest.
As mentioned above, of course a kid with the advantages of life has a better chance of material, if not emotional, success.
And we know that destroying state infrastructure in the interests of
“small” (eg ineffectual) government further widens the divide with the inclusion of two “bads”: removal of alternatives for the less well off so that only the offspring of the well-off get access to concerted education and further tax cuts for the rich to waste consolidating their power, as facilities for the poor are instead postponed.
If rich kids “fail”, it’s more likely because of the warped values exemplified by their grasping parents: victimhood/entitlement, “world owes me a living”and the zealously prosecuted continuing war against the backsliding”undeserving” poor.
Paul, people want their kids to get a good education so they can do well in life. They send them to good schools because they want their kids to face some competitive pressure (also for other reasons) not because they want to sheild their kids from competition. Ensuring that poor kids get a bad education does not provide greater opportunities for rich kids. Andy implied that that the rich of America are actively trying to ensure that the poor get a bad education. This is the idea that I reject.
Government in Australia can get a lot smaller without impacting on transfers from rich to poor simply by focusing on churn. And it can certainly be done in a manner that would improve the lot of those who occupy the bottom quartiles.
An important and useful question. I suppose it’s about thinking about the barriers to social mobility and how those barriers can be removed, or their adverse consequences lessened for those in poverty or on low incomes. In no priority order my suggestions would be:
High quality social services including protection of children. Children from poor families are over-represented in abuse and neglect stats. So, increased resources to helping those children and families, including direct intervention (including removal) when children are in abusive households.
High quality and fee-free (for those on low incomes) child care. Related to above, it gives kids a good social environment in the important formative years, gives them nutritious food for the day and gives their parents an opportunity to earn higher income from full or part-time work.
Fee-free and high quality education. This includes additional money for high quality teachers in disadvantaged areas, strong management of teacher performance, and standardised tests to determine those schools that need additional help. Transfer funding from private schools to disadvantaged public schools to fund.
Income that allows savings. So people on low incomes can save, reduce the marginal tax rates for poor and low income easrners. Raise rates elsewhere on the income scales, and remove industry subsidies etc, to fund this.
Competitive credit markets that lend to people with a low asset base to allow them to start a business. So those on low incomes who want to start a business have access to credit.
Competitive and low cost premiums for insurance, to allow people to insure against catastrophic events and therefore not be bounced back to poverty when they experience bad random events.
Fee-free and universal health and dental care, for the same reason as above.
That would be a start.
@boconnor
Thank you.
I interpret that as meaning that the most efficient (effective?) way of helping the poor is to provide them with opportunities. So the idea is to raise, rather than lower, taxes on the rich and to spend the tax income on education, insurance and health? (And what is the optimum level of tax?)
Is direct income redistribution through taxes from high income earners to low income earners or to those who earn no income at all not regarded as useful? What about people with disabilities of a kind that prevent them from fully partaking of these opportunities?
Your welcome.
Ah, the $65 billion question. The simplistic answer is: determine your social policy goals, calculate their cost and then raise revenue to cover it.
But, of course it’s much trickier than that. For instance consider child protection services. The marginal cost of protecting the next vulnerable child rises inexorably once you have protected the majority of the vulnerable and reachable children. It’s not at all clear when to stop investing in additional child protection services (i.e. when the cost becomes too high). That’s probably the reason budgets are currently allocated using a percentage increase or decrease on the previous year, rather than starting from scratch with clear objectives about how many and in what situations children are to be protected. The latter is much harder to do than the former. It’s also scarier for politicians because it forces them to indicate who will not be covered by their social policy.
I suppose it’s also not just about marginal tax rates. It’s also about what gets subsidised. Lots of money could be liberated from the hands of industry and redistributed to those in need.
Yes, I think it’s useful.
I suppose it would be a mixture of (a) additional direct income transfers to account for the increased costs faced by those with disabilities, and (b) enhanced social services (eg face-to-face assistance) to help those with disabilities take advantage of any opportunities that may arise.
A lucid logical deconstruction of the argument, Prof Q. It could be fun to go further, since the Sowell account equates ‘actually happening’ with ‘not prohibited by law’. It’s also a corollary of Anatole France’s line that
“Ensuring that poor kids get a bad education does not provide greater opportunities for rich kids.”
Sure it does. Would you rather be one of 30 qualified applicants for a job, or one of 3 because the other 27 didn’t get a sufficient quality education to render them qualified? Clearly, the latter is a greater opportunity.
Furthermore, the rich don’t have to actively sabotage education for the poor in the sense of firebombing schools or something like that; they just have to prevent their own wealth from being taxed to fund it. The poor, by definition, can’t fund much of anything, so if the education of poor children isn’t funded adequately by taxes it won’t be funded adequately at all. (And isn’t, in the present-day U.S.)