Refuted economic doctrines #5: Trickle down

The idea that policies favorable to the wealthy, such as financial deregulation and favorable tax treatment of capital income, will ultimately benefit everybody has been described, pejoratively, as ‘trickle down’ economics.

The same idea been summed up, more positively, in the aphorism ‘a rising tide lifts all boats’ attributed to John F Kennedy, and a favorite of  Clinton advisers such as Gene Sperling and Robert Rubin. (It should be noted that this phrase is also used in the context of debates over free trade and over the effects of macroeconomic expansion. While it generally implies that we should focus on expanding aggregate income without too much concern over distribution, it is less sharply focused than the ‘trickle down’  pejorative.

Whatever you call it, trickle down economics is one of the casualties of the financial crisis. I’m not the first to point this out, and I’m sure I won’t be the last, but here’s a piece summing up my thoughts.

US experience during the decades of neoliberalism gives little support for this view. In the period since the economic crisis of the early 1970s, US GDP has grown strongly, and the incomes and wealth of the richest Americans has grown spectacularly. 

By contrast, the gains to households in the middle of the income distribution have been much more modest. Between 1973 (the last year of the long postwar expansion) and 2007, median household income rose from $44 000 to just over $50 000, an annual rate of increase of 0.4 per cent. (More on this here and here)

Household size has decreased, mainly due to declining birth rates. The most appropriate measure of household size for the purpose of assessing living standards is the number of “equivalent adults” derived from a formula that takes account of the fact that children cost less to feed and clothe than adults and that two or more adults living together can do so more cheaply than adults in separate households.  The average household contained 1.86 equivalent adults in 1974 and 1.68 equivalent adults in 2007 (my calculations on US census data). Income per equivalent adult rose at an annual rate of 0.7 per cent over this period.

For those at the bottom of the income distribution, there have been no gains at all. Unlike the situation in Australia and other countries where a poverty line is defined in relative terms, as a proportion of average income, the US has a poverty line fixed in real terms, and based on an assessment of a poverty-line standard of living undertaken in 1963. 

The proportion of Americans below this fixed poverty line fell from 25 per cent in the late 1950s to 11 per cent in 1974. Since then it has fluctuated, reaching 12.5 per cent in 2007, a level that is certain to rise as a result of the financial crisis and recession now taking place. Since the poverty line has remained unchanged, this means that the incomes accruing to the poorest 10 per cent of Americans have actually fallen over the last 30 years.

Other measures yield similar conclusions. Median earnings for full-time year-round male workers have not grown since 1974. Women have done a little better, with median earnings for full-time year-round workers rising by about 0.9 per year over this period. 

Overall, the main factors sustaining growth in living standards for American households outside the top 20 per cent have been an increase in the labour force participation of women and a decline in household savings. Over the period since 1999, consumption financed by borrowing against home equity has been the main factor offsetting stagnant or declining median household incomes.

Thus, in statistical terms the US offers little support to the trickle down theory. It is equally important, however, to look at how the theory is supposed to work. The general idea is that, the more highly owners of capital and highly-skilled managers are rewarded, the more productive they will be. This will lead both to the provision of goods and services at lower cost and to higher demand for the services of less-skilled workers who will therefore earn higher wages.

The financial sector is the obvious test case for this theory. Incomes in the financial sector have risen more rapidly than in any other part of the economy, and have played a major role in bidding up the incomes of senior managers and professionals in related fields such as law and accounting.  According to the trickle-down theory, the growth in income accruing to the financial sector benefitted the US population as a whole in three main ways.

First, the facilitation of takeovers, mergers and buyouts by private equity firms offered the opportunity to increase the efficiency with which capital was used, and the productivity of the economy as a whole.

Second, expanded provision of credit to households allowed higher standards of living to be enjoyed, as households could ride out fluctuations in income, bring forward the benefits of future income growth, and draw on the capital gains associated with rising prices for stocks, real estate and other assets.

Finally, there is the classic ‘trickle-down’ effect in which the wealth of the financial sector generates demands for luxury goods and services of all kinds, thereby benefitting workers in general, or at least those in cities with high concentrations of financial centre activity such as London and New York.

The bubble years from the early 1990s to 2007 gave some support to all of these claims. Measured US productivity grew strongly in the 1990s, and moderately in the years after 2000. Household consumption also grew strongly, and inequality in consumption was much less than inequality in income or wealth. And, although income growth was weak for most households, rates of unemployment were low, at least by post-1970 standards for most of this period.

Very little of this is likely to survive the financial crisis. At its peak, the financial sector (finance, insurance and real estate) accounted for around 18 per cent of GDP and a much larger share of GDP growth. With professional and business services included, the total share was over 30 per cent.[1] The finance and business services sector is now contracting, and it is clear that a significant part of the output measured in the bubble years was illusory. Many investments and financial transactions made during this period have already proved disastrous, and many more seem likely to do so in coming years.  In the process, the apparent productivity gains generated through the expansion of the financial sector will be lost.

The failure of the trickle-down approach has been even more severe in relation to consumer finance. The idea that increasing income inequality was unimportant when households could borrow to finance growing consumption was never defensible. The gap between income and consumption had to be filled by a massive increase in debt. With sufficiently optimistic assumptions about social mobility (that low-income households were in that state only temporarily) and asset appreciation (that the stagnation of median incomes would be offset by capital gains on houses and other investments)  these increases in debt could be made to appear manageable, but once asset prices stopped rising they were shown to be unsustainable.

In the US context, these contradictions have been resolved for individual households by a massive increase in financial breakdowns. Until 2005, this mainly took the form of a steady increase in bankruptcy, to the point where Americans were more likely to go bankrupt than to get divorced.  Restrictive reforms introduced at the behest of the credit card industry produced a dramatic drop in bankruptcy (in part, the lagged counterpart a massive upsurge in 2003 and 2004 as people rushed to get in under the old rules). From 2006, onwards, bankruptcy rates resumed their upward trend, reaching 1.1 million per year in 2008

This trend attracted little attention as bankruptcies were rapidly overshadowed by foreclosures on home mortgages. During the boom, when overstretched householders could normally sell at a profit and repay their debts, foreclosures were rare. From 2007 onwards, however, they increased dramatically, initially among low-income ‘subprime’ borrowers but spreading ever more broadly. 2.3 million houses were affected by foreclosure action in 2008. In hard-hit areas of California, more than 5 per cent of houses went into foreclosure in a single year

As in other respects, the longer-run implications of the crisis have yet to be fully comprehended. Even when economic activity recovers, consumer credit will be far more restricted than in past decades. As a result, there will be no escape from the implications of decades of stagnant wages for workers at the median and below.

Politically, the failure of the trickle-down theory seems likely to produce a resurgence of the class-based politics pronounced dead in the era of economic liberalism. The contrast between the enforced austerity of any recovery period, and the massive, and massively unjustified, excesses of the financial elite during the boom period, will produce a political environment where phrases like “malefactors of great wealth” no longer seem quaint and old fashioned. (Just after writing this, I Googled it, and found it as the title of a piece in Time Magazine’s Swampland by Joe Klein, among the most reliable indicators of the political zeitgeist_

fn1. Here I’m measuring the ratio of gross FBS output to gross domestic product, which is the figure most relevant to the argument. The value-added in FRB (which nets out inputs purchased by the FRB sector) is smaller, around 20 per cent, but still indicates a highly financialised economy.

90 thoughts on “Refuted economic doctrines #5: Trickle down

  1. An excellent and timely post JQ. The political stability we take for granted in our society is not guaranteed if we create a permanent underclass. Events right now in several countries in Europe prove the point.

    The comment that finance and business has reached 30% of GDP really is staggering. In a sense, that is purely a cost to other productive sectors of the economy. How can you say that financial services are a good or service consumed to icnrease utility. They are usually transactions that could be eliminated with the stroke of a pen.

    IF we are serious about fixing this problem, doesn’t that also imply that there is a huge need to retrain and redeploy people out of jobs in the finance sector? The sector has only grown because of illusory profits and comissions paid under dubious crcumstances. If we move to a transparent system, where such costs will be minimised, the employment too will be minimised.

    Perhaps its time to do some study of the eocnomics of the economcis and finance sectors 😉

  2. There is no reason in terms of economic theory for ‘trickle down’ to work* since many market liberalisations favour capital. Of course they need to be accompanied by redistributive tax/spending policies to make sure all share in the benefits. That this has failed somewhat in the US shows not that economic liberalism is unsound but that the right types of accompanying tax policies were not employed.

    Sensible US policies would seem to me to include introducing a national health scheme and increased transfers to those disadvantaged.

    These I guess can be characterised as class-based policies.

    Also recognition that CEOs do not need to be paid nearly 400X average earnings to allign their self interest with shareholders. This business school ethic is not only unjust but also manifestly ineffective.

    *BTW I recently read about ‘trickle down’ in Adam Smith’s Theory of Moral Sentiments.

    Smith believed that while the accumulation of great wealth deceives the rich by not bringing them welfare gains, it would, generate overall economic development and by an ‘invisible hand’ (TMS (p. 184)) advantage the poor.

    ‘It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for’. (TMS, p.184).

    Thus cross-sectional differences in income will bring about only small changes in happiness because the rich dissipate increased wealth on trinkets while the distribution of necessities is more equal.

    Apologies for long quote.

  3. “The finance and business services sector is now contracting, and it is clear that a significant part of the output measured in the bubble years was illusory.”

    If I may state the obvious, the foregoing is a significant conclusion. It means, in a monetary economy, illusory output is possible and, by implication, illusory performance measures (KPIs) are also possible. But, income based on illusory performance measures constitutes purchasing power in both consumer and physical asset markets. … illusory output has real wealth redistribution effects.

    The question arises: Why is a redistribution of wealth via illusory output acceptable to many but a redistribution of wealth, via social institutions such as governments, to come closer to the ‘minimum wealth condition’ in general equilibrium models of competitive private ownership economies is not acceptable?

    I look forward to reading JQ’s collected works on what I call – for lack of a better term – the discovery of the alternative universe theory of ‘market economics’.

  4. The best description of “trickle down” economics I ever heard was by JK Galbraith (I think) so Ill have to post it here naturally

    “trickle down economics is the idea that if you feed the horse enough oats eventually some will pass through to the road for the sparrows.”

    Cant help it. I love it.

  5. What can I say – JQ has nailed it as far as I’m concerned.

    The “trickle down” theory is nothing more than a lazy economist’s or politician’s rationale for dodging responsibility on dealing with social problems. It is the ultimate “do nothing” defence.

  6. John, during the last US Presidential campaign John McCain had plans of reducing the CGT rate from 15% to 7.5% for the next two years. But the so-called trickle-down economic effects from the reduced CGT rate would not have helped those caught up in the current financial crisis one iota albeit the top 20% income earners. Had McCain won the Presidential race, then the gap between rich and poor would have widened making a mockery of the so-called ‘trickle-down economics effects’.

  7. Microcredit systems are the opposite of trickle down economics. Australia has stayed with trickle down financing and there are few examples of microfinancing.

    The financial system is organised to give capital to those who have and to withhold capital from those who have little. It looks set to stay this way.

    The reason is the way we allocate credit and hence money. Rather than giving credit for a purpose we give credit on how much you already have. If you are a start up business you cannot get credit no matter how good your idea. It is even difficult to get investment. If you have a lot of assets you will get credit no matter what your idea.

    The young and the energetic are often the ones with innovative ideas, yet they are the ones from whom we withhold capital because except for those who inherit it they start with nothing.

    Today’s financial and political situation perhaps gives us a once in a generation chance to reexamine restricting access to capital to those who already have capital and give access to capital to those who will do the most with it.

  8. “…higher demand for the services of less-skilled workers who will therefore earn lower wages” – a typo for higher, surely? Fixed thanksAnd I take it that income numbers are adusted for inflation, but to what base?2007 dollars, IIRC, but choice of base doesn’t matter much in looking at trends, JQ

    The Adam Smith observation is valid for his time and place, but the 19th century evictions in Ireland, the Highland Clearances, and the first (Tudor) round of Enclosures of the Commons provide counter-examples. With those, production of staples consumed locally was replaced by cash crop production for export markets (cattle in Ireland and wool in Scotland and England) and any trickle down occurred in the countries where those markets were, generating the goods and services that flowed back to the landlords.

    Trickle down has worked on occasion, when it led to many levels of society each gaining a slow but cumulative increment of capital rather than funds for current consumption that largely bid up the prices of current consumption. Periclean Athens was a case in point, where the authorities took care that nearly everybody’s business would be able to participate in temple construction and defence efforts etc. financed by the Delian League treasury (Pericles argued that piety like that contributed to the Delian League’s general defence effort). And it is true that until recent decades when defence went more high technology, defence spending did permeate more widely more rapidly than most other forms of government spending.

  9. It seems to me that for anyone who mocks the whole notion of ‘trickle down’, you have to ask the question. Are the poorest fraction of the population in wealthy nations better off than the poorest fraction of the population in poor countries? If so, how do they get the money if some of it doesn’t leak downwards from broader societal affluence further up?

    By defintion, if nothing trickles down, then there should be no correlation between general societal affluence and the wellbeing of the poorest sections of society. A marginal worker in Sydney should be no better off than one in Bangladesh.

    Of course, the existence of compulsory state redistribution rather than trickle down through the market may go some way to explaining things. But it still wouldn’t explain why a low-skilled worker in a wealthy country still earns more than a low-skilled worker in a poor country. Minimum wage laws may account for some of that. But even in the absence of those, the ‘market clearing’ wage in a wealthy country would still be higher.

    One can legitimately argue over how much trickles down. But I fail to see how one can argue over the existence of trickle down per se.

    One can argue

  10. sorry for the above typo, re the redundant last sentence.

    I guess no-one will take my point seriously now 🙂

  11. Monkey’s Uncle @11, the content of your paragraph 2 assumes that “everything” (all wealth) was at the top. How did it get there?

  12. Ernestine, I didn’t say anything to suggest that everything must be at the top to begin with.

    But even if it was, it still doesn’t answer the question of what leaks out elsewhere or ‘trickles down’.

  13. “Trickle down” is more accurately named “pi***ing down on you from a great height”.

  14. MU – I don’t think anyone disputes that money moves around the system – the question is more around how income growth moves around the system – and the essential thesis here is that it has been flat since the 70s.

    Incidentally, I think a lot of the reason there’s a floor in the West is down to the effects of historical social policy rather than the economic system setting a natural floor. The Right have long wanted to dismantle the welfare state, and redistribute the tax savings upwards.

    Socrates – a strong finance sector could, theoretically, produce 30% of GDP without significant cost to other productive sectors, if it was largely based around successful foreign ventures (presuming they did not undermine other sectors of the local economy). The only thing you would be losing would be talent that could be applied more usefully. Of course this is just pie in the sky theory.

  15. wealth inequality, exacerbated by trickle down economies, is the primary cause for dissatisfaction within a society. This is heading back to the “economics of happiness” debate from a few months back. But the issue is really at the heart of everything associated with the GFC. Why do we need growth? Why do we need wealth? What do we really want from this earth and our lives? These inequalities will cause increasing violence around the globe as people continue to lose faith in the Credit god.

  16. plaasmatron – I completely agree – ethics needs to be central. The question uppermost within public discussion (and by extension, politics) should be – What is the good life and how do we achieve it?

  17. My god the whole of Australia is indeed going Troppo!

    Here is an idea to help economists and most importantly the wider public attain a more “scientific” understanding of economic arguments.

    Instead of data games, my data is better than your data, and my new data refutes your old data, Circus, lets try that old right wing…(afterall it must be right wing to be opposed to your obvious scientific thinking)… thing called “logical arguments”

    1, would you prefer to be poor in a poor country or poor in a rich country?

    2, I note that the post does not contain the word “immigration” or “immigrants” and as the US is the destination of choice by far, for poor people to rich countries ( a greater Exodus from Africa to the US than even the slave era in the past decades, just ask Bam) you would would have thought that this would have a massive impact on its poverty rates, as immigrants tend to start at the bottom.

    3, The misery has certainly trickled down as a result of the current economic unpleasantness, thus its not a leap of faith to say the trickle down effect is indeed true, in fact I should think its about to gush down.

    4, What is the real measure of wealth? I have a 24 year old Persian cat (she is 8 years from the world record), she is a house cat and eats a very good diet and goes for regular check ups at the vets, she has had 4 litters and no kitten died, thus a healthy lifestyle is mirrored in low infant mortality and increasing years on this earth? Thus a measure of wealth is really health brought about by wealth or the ability to attain better living standards.

    5, When I was born my life expectancy was 69 years, as we have become more wealthy either both personally or socially my expected time of departure is nearly 79 years, even Higher for Australians (it must be all that global warming)

    btw, My brother died of a whole in the heart two weeks after his birth, today this is unheard of. this is not progress brought about by increased wealth?

    UK NSO “In recent years, the increase in life expectancy among older adults has been dramatic, particularly for men. Between 1981 and 2002, life expectancy at age 50 increased by four and a half years for men and three years for women. For those aged 65 and over the extra years of life were three years and two years respectively. By 2002, women who were aged 65 could expect to live to the age of 84, while men could expect to live to the age of 81.”

    It seems to be Logical that the explosion in wealth of our societies has lead directly to higher standards of living for the majority of people, despite recessions, booms and busts, stupid bankers with daft risk models, even stupider politicos with even dafter politically correct housing policies, but hey ho, its all refuted, those holy models and data sets hey?

  18. Am I reading this right? Did you say trickle down worked from 1990-2007, yet because Wall street made imprudent investments the philosophy is bad. The two don’t have anything to do with each other. Leave the system alone, educate the poor and jail those who game the system.

  19. Monkeys Uncle and Juleslt am i wrong to say that when ProfQ sais

    “The general idea is that, the more highly owners of capital and highly-skilled managers are rewarded, the more productive they will be. This will lead both to the provision of goods and services at lower cost and to higher demand for the services of less-skilled workers who will therefore earn higher wages.”

    he is not suggesting that the marginal productivity (and thus wage) of an unskilled worker does not benefit from increases in the amount of capital or high skilled collegues.

    He is sugesting that increases in the reward to holders of capital and high skilled managers will not (necessarily) flow on to benefit other people.

    I am also guessing the trickle down economics we are referring to is the usual justification for giving the well off tax cuts (or the failure to give the well off tax hikes)and the overstatement of the negative affects of redistribution policy.

  20. “The general idea is that, the more highly owners of capital and highly-skilled managers are rewarded, the more productive they will be. This will lead both to the provision of goods and services at lower cost and to higher demand for the services of less-skilled workers who will therefore earn higher wages.”

    Like a lot of theories, this one has taken on a much wider meaning. In some sense, it is true that more investment leads to more jobs. Hence, if you encourage investment with tax breaks, that should lead to more jobs. It seems to me that the real question you’re asking, which is a very good one, is why the middle and lower income earners seem stagnant? Shouldn’t the standard of living be going up? As I understand most free market theories, it should.

    Of course, unlike you, I believe that we have a welfare state. Here’s a paper similar to my view:

    http://www.petersoninstitute.org/publications/interstitial.cfm?ResearchID=1096

    Most likely, lobbying accounts for much of the problem. In other words, contrary to what people believe in theory, the Investor Class, say, is simply far more effective at getting policies in their favor adopted. They are not all free market, as tariffs and professional standards will often attest.

    My solution is simple: we need to focus on the problem and try whatever we can to alleviate this problem. Sometimes, lowering government requirements, based on large industries, for example, will encourage competition from smaller businesses. Michael Pollan and Barbara Kingsolver’s recent books both mention this problem, for example.

    In other words, I see the problem as political. You can call my approach class based if you’d like. I prefer to call it an approach that leads to a wealthier and more stable society. When people are wealthy enough, including the middle class and lower class, government will have far less to do. For me, there is no diminution of government power and interference that doesn’t involve the rising economic tide of the middle and lower classes. At some point along this path, we will, as Thoreau said, have the kind of government we deserve. Namely, confined to helping the truly needy, which will hopefully keep getting smaller and smaller.

  21. I have never come across any support or espousing of ‘tickle-down economics’ in any book, article or web post i’ve read. Can you point me to some sources? You don’t even name any names in the entire article.

    The only non-sarcastic reference to ‘trickle-down’ i’m aware of is Robert Sowell’s ‘Basic Economics’, that mocks the idea as the straw man that it is, and describes the process of wealth accumulation as to be more accurately considered as ‘trickle-up’. That is, investment profits are never guaranteed but wages and contractors have to be paid.

    To repeat, who are all these people advocating ‘tickle-down economics’, and what are the references so that your readers can judge for themselves?

  22. “Whatever you call it, trickle down economics is one of the casualties of the financial crisis…”

    Really? The people who liked policies that (let’s say) can be plausibly be described as trickle down will will like them any less now? The people who criticized those policies as trickle down will hate them any more now?

    If trickle down is really dead, that may just be a political shift, not a shift in the ideas held by any particular person or group.

    The evidence presented in the post is the familar story of increasing incomes at the top and stagnating incomes at the bottom. Of course “trickle down” is not the idea that incomes are increasing at the top but the idea that certain policies, likely to accompanied by increasing incomes at the top but also an by an even larger increases in GDP, are being followed. What’s the evidence there? Did the stagnating incomes at the bottom result at all from reduced taxes on capital, or increased deregulation? I notice the post doesn’t claim that.

    Similarly, did the “facilitation of takeovers, mergers and buyouts by private equity firms” “increase the efficiency with which capital was used, and the productivity of the economy as a whole,” or not? Why raise this sort of question if its resolution is not important to whether trickle down is a good idea or not?

    Personally, I think “trickle down,” at least as defined as amorphously as here, is as alive as ever. There is still going to be a debate over what the optimal tax rate on capital and optimal marginal rates on income should be, and the “rising tide lifts all boats” idea will remain very much alive for those who think that in certain cases a lower rate can be better than a higher rate. (I.e. there will always be a debate over just what these rates should be, and there will always be various points at which various people will conclude that the inequality-diminishing effect of higher rates will not be worth a GDP-diminishing effect). The idea that it would be nice to reduce CEO pay will continue to run into (at some point) “rising tide lift all boats” type arguments as well.

  23. “To repeat, who are all these people advocating ‘tickle-down economics’, and what are the references so that your readers can judge for themselves?” Andrew

    You clearly have internet access, so google it and stop wasting everybody’s time

  24. #24 Read the post,then look up “pejorative” in the dictionary. People who advocate trickle-down economics don’t generally use the term. That doesn’t mean they don’t exist.

  25. i would contend that the entire premise is flawed,

    trickle down was never a serious economic doctrine,
    so its refutation is giving it legitimacy it doesnt deserve…
    like most of the pseudo economic conversation of the last forty years it was part of a sophisticated smokescreen to restore an aristocratic class system and redirect wealth to the ruling class,
    none of the chicago clowns actually thought that they were creating wealth or stable economic systems, or helping to lift everyone in society,
    that would make them morons which they are not,
    they were warriors for the upper class,

    they must have laughed their arses off at concepts like that behind closed doors

  26. Anon/portly there should really be a marginal tax rate on capital which does more harm then good. It is almost certain that we (and america) are no where near that point.

  27. A question for Professor Quiggin: (Refuted economic doctrine #6?)

    I have seen the claim made elsewhere that the financial deregulation of the past 30 years has allowed advanced economies to transition from an economy with credit rationing, to an economy without credit rationing. Its been hailed as “the democratisation of credit”, giving access to credit to people on lower incomes who were previously denied the opportunity to borrow.

    However, we’ve ended this period of deregulation with a thumping credit crunch where almost everyone, including low risk businesses and consumers, are having difficulty getting credit.

    Does the financial crisis invalidate the “democratisation of credit” idea, or is it too soon to tell?

  28. What’s puzzled me for years is how you can reconcile the stagnant hourly pay rates for the great bulk of workers in the US over a long period with consistent labour productivity (ie output per hour) growth. It must imply either that the productivity of a small subset of the population has absolutely soared, or that there is something deeply astray with the neoclassical view that workers are paid their marginal product.

    Since the minority whose earnings per hour have soared are overwhelmingly rentiers of one form or another rather than actual producers of anything, the former seems most unlikely.

  29. Noting some of the posts I think we need to distinguish between rewards to owners of capital and highly paid managers in the trickle down context. IMO it is the latter group that is the problem. These days most shares are owned institutionally and paid for by the compulsory super contributions of average wage earners. Hence the owners of capital are not all wealthy. There is a very large trickle down problem between corporate executive management and what is passed to shareholders.

    Paying very large sums to management does NOT guarantee efficient outcomes. The effectiveness of an incentive depends on the relative value of the income and substitution effects for those concerned. If the substitution effect is higher then a pay incentive may result in lower work input.

    Judging by recent evidence I would say we are well and trully past the point where increased pay to managers incentivises improved performance. See analysis by John Shields and Lucien Bebchuck.

  30. Of course trickle-down doesn’t exist. Each and every actor in the economy is incented to minimize trickle-down, by seeking to pay as little as they can for the services and goods they require, by finding or imposing the best deal they can.

    By contrast, the economy is geared to favor trickle-up.

  31. In terms of how this refuted should affect policy, surely rather then legislating against large incomes and bonuses for CEO’s it makes more sense to redistribute them.

  32. El Mono

    I don’t see how that follows. This group is notorious for hiding much of their income in non-taxable ways. What is wrong with a straight limit on their income? It is the shareholders money, not theirs.

    What is wrong with a rule on publically listed companies that links maximum CEO pay to average employee pay in the same field? The evidence clearly shows that the current “market” for exec pay is broken and the pay rate is not reflective of shareholders interests being policed by directors. It has consistently gone up faster than average wages, GDP, and share returns for the past 2 decades. In a private company they can do what they like, but then its not wage earner’s money being invested into them via super funds. Since compulsory super and weak comppany regulations have distorted this market, thne I think it is entirely justifiable to have another external intervention (multiplier limit on exec wages) to straighten it out.

  33. what about both

    stop the tax avoidance and secrecy, and set limits to pay, like err the minimum wage

  34. El Mono says “he is not suggesting that the marginal productivity (and thus wage) of an unskilled worker does not benefit from increases in the amount of capital or high skilled collegues.

    He is sugesting that increases in the reward to holders of capital and high skilled managers will not (necessarily) flow on to benefit other people.”

    If the critique being offered is that economic growth or increases in income for high-income earners won’t always or automatically lead to greater benefit for the entire population or low-income earners, then the critique is correct in that narrow context.

    The problem with this is that it largely takes existing income distributions for granted, and assumes the only issue to be decided is who benefits from growth. Yet there is also a possibility that those in marginal industries could have seen falling earnings in the absence of trickle-down.

    The other issue is that even if economic growth doesn’t benefit everyone in the short term, that doesn’t mean that more benefits won’t flow through to a greater share of the population sooner or later.

    The problem is that just because something doesn’t always work well all the time, doesn’t mean it is useless or should be ignored.

  35. sooner or later

    like the long run…

    i’ll tell that to my little boy,
    i’ll say hey, the prospects are sh*t for your generation because a bunch of my fathers generation stole as much as they could aided by complicit politicians, accounting firms and regulators caught in the revoloving door,
    but the system will probably work in the end,
    maybe for your childrens children…
    so dont lose faith in the free-market system,

    these thieves are lucky that most humans are currently delusional and eternally hopeful against all rational evidence…

  36. I don’t get how you can utterly ignore the increasing nonwage compensation middle-class workers are getting in the form of health insurance. Sure, toss it off as a less-valuable or flawed kind of compensation, but don’t just talk about flat wages like that’s the only thing in the picture.

  37. Clearly Turnbull still believes in tax cuts and trickle down, perhaps you should give him a talking to.

  38. DD,

    Inflation is the culprit, compare US productivity, inflation and real and nominal wages growth. I haven’t look at non wage benefits but others also acknowledge this as well.

    Trickle down exists if you believe in inputs receive factor flows vis a vis marginal productivity.

    How do you raise wages without increasing the capital (broadly defined as far as knowledge capital) base?

    How do you then “avoid capitalism” if you allow private ownership?

  39. A mostly agreeable list for social democrats:

    ——-

    What has Rudd done for the poor?

    1. Challenged the ETS on equity grounds?

    2. Raised the tax free threshold and cut income taxes?

    3. Bullied the states to abolish job destroying payroll tax?

    4. Tackled income destroying inflation?

    5. Cut excise tax on petrol needed for transport, expecially in out of the way areas?

    6. Eliminated job destroying, inflationary and socially srtatifying taiffs?

    7. Eliminated subsidies for big business that could otherwise fund general tax cuts and increase incomes and employment?

    8. Allow nuclear power that will create a new source of energy to lower market prices for power?

    9. Cut capital gains tax, company tax and gotten rid of xenophobic foreign investment policy that fund new investment and jobs?

    Is the answer to all of these no? I wonder if his 9000-word-essay extolls the virtue of such omissions?

  40. 42# Mark

    What did the coalition do for the poor Mark? Accused charities of being left wing and the poor of being lazy?
    At least Rudd has a fiscal stimulus plan and is spending money on the states which is more than can be said for years of the obscene surpluses being accrued by the coalition whilst the states and local governments fell into deficit in aggregate across Australia (with not one iota of interest from fed), asset stripping of the public sector, – oh and dont forget upper middle class and wealthy welfare initiatives, and then to add insult to injury we got workchoices for us and our kids and hecs debts through the ceiling.

    You must be joking.

  41. Oh and dont forget all the taxpayers monies that got chanelled to private schools. Did that make the prices fall? Did that help the poor?

    These poor conservatives who feel so cheated now that a little bit of balance is back in government. I feel so sorry for them. They have been voted out here and out in America and they need to respect that and listen to what voters want. At least a step in the right direction for Australia not the right “wrong” direction. All this nonsense about leaving the market to sort “everything out”, including its own regulation of the financial markets, is seen for what it is. Monumentally and spectacularly stupid.

  42. Alanna,

    The coalition milked labour’s record on debt for far too long in Parliament. It was boring and irrelevant. Please do not use the same boring diversion tactics rhetoric.

    If Rudd is opposed to 2, 3 and 7, he simply isn’t serious about helping the poor.

  43. 8. Allow nuclear power that will create a new source of energy to lower market prices for power?

    this one is the giveaway

    the opposite would occur

  44. Mark Hill

    Most of your list are non sequiters in relation to the topic JQ raised but some are also just false. As well as agreeing with smiths on No.8 there is also No.4, to which the answer is Yes. The last CPI figures were negative. I’d say inflation has been fought and killed. As other posters have pointed out in the past, deflation is now a greater danger.

  45. Wow, I’ll bite:

    6. Eliminated job destroying, inflationary and socially stratifying taiffs?

    Now I thought I knew trade theory reasonably well, and I know economists are not fond of tariffs – but all threee of those are new to me!

    How are static (i.e. not increasing) tariffs inflationary? How do tariffs destroy jobs exactly? And why are they socially stratifying (suggesting the winners from tariffs are better off than the losers).

    I know that it is argued that tariffs reduce aggregate welfare by increasing prices (but not the rate of change of prices) but even this is disputed in an environment where we have manipulated exchange rates and free international capital flows. The theory of second best hasn’t been repealed as far as I know.

  46. Very interesting post about the increase in credit hiding the static wages of those at the bottom.

    Inflating the cost of real estate, whilst making credit easier to obtain is the opposite of a trickle down effect. Housing is a basic necessities. The trickle down effect has led to people being left homeless – this means that it hasn’t worked.

    Andrew #24 the Liberal Party was very big on the trick(le down) effect. The constant statements about the politics of envy, that there are no classes, was used to mask the massive con that occurred under the administration of the Howard government; the flood at the top was ignored by the government and the press by focussing on the benefits of a few drops at the bottom.

  47. Except that as far as I know inflation doesn’t destroy income. Low steady inflation is pretty neutral to almost all income (it is incorporated in interest rates, wages are usually regularly adjusted for inflation as are pensions).

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