Dispelling the "trickle-down" myth

Dick Gephardt, who couldn't even beat Michael Dukakis for the Democratic nomination in 1988, is at it again--the blue-collar entry in a field of would-be Democratic challengers to George W. Bush's re-election bid. Since Gephardt is supportive of Bush's Iraq policy on the whole, he has to make a name for himself in the Democratic base on the economic front--and this means intellectually dishonest rhetoric. He has therefore pledged a platform based on "trickle-up economics." Economist Steven Landsburg ably derides this speciosity in this piece published today. Excerpt:

The Democrats have been using it [the phrase "trickle-down economics"] to bash Republicans at least since 1932. It seems to refer to any Republican policy that has any chance of benefiting anyone other than the desperately poor. The underlying reasoning seems to go something like this: "We all know that governments should exist only to help the poor. But these Republicans are doing something that might help the rich. Therefore they must believe that helping the rich can help the poor. Ha ha ha."

To which the right responses, of course, are: "No, governments do not exist only to help the poor; they exist, ideally, to preserve the rights of all citizens, regardless of their income." And: "Anyway, whaddya mean, 'ha ha ha'?"

But to those who still buy the old line that supply-side policies, such as capital gains tax cuts, amount to "trickle-down economics" first should realize that "there has never been any school of economists who believed in a trickle down theory. No such theory can be found in even the most voluminous and learned books on the history of economics. It is a straw man." This according to the economist Thomas Sowell who does a tremendous service by clearing up this issue in this piece written in 2001. Supply-siders don't believe in "trickle-down"--they are only said to believe in it by liberals.

This excerpt from Sowell's piece explains why supply-side, Reaganomics does NOT equate to trickle-down economics (and why if Gebhardt truly wanted a "trickle-up" economic platform he should support the Bush plan):

Those who imagine that profits first benefit business owners -- and that benefits only belatedly trickle down to workers -- have the sequence completely backward. When an investment is made, whether to build a railroad or to open a new restaurant, the first money is spent hiring people to do the work. Without that, nothing happens.

Money goes out first to pay expenses and then comes back as profits later -- if at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back.

Even with successful businesses, years can elapse between the initial investment and the return of earnings. From the time when an oil company begins spending money to explore for petroleum to the time when the first gasoline resulting from that exploration comes out of a pump at a filling station, a decade may have passed. In the meantime, all sorts of employees have been paid -- geologists, engineers, refinery workers, truck drivers.

Nor is the oil industry unique. No one who begins publishing a newspaper expects to break even -- much less make a profit -- during the first year or two. But reporters and other members of the newspaper staff expect to be paid every payday, even while the paper shows only red ink on the bottom line.

In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a "trickle-down" theory. As for capital gains, some countries don't tax capital gains at all. They tax a business' earnings, but not capital gains, which are harder to define and sometimes illusory.