The False Death of Trickle-Down Economics

It’s fashionable in certain economic circles to mock the notion of trickle-down economics, the process whereby success enjoyed by the wealthy accrues to those not wealthy. As recently as August economist Jared Bernstein wrote that “Trickle-down economics died yesterday at 10 AM,” and in a column last year recent Nobel Laureate Paul Krugman asked “Where’s My Trickle?”

It turns out the “trickle down” theory that Krugman et al dismissed so jubilantly is alive and well; the certain and positive truth when it comes to trickle-down sadly showing up in reverse. Indeed, newspaper headlines and articles amid our ongoing economic struggles make plain that its deniers wrote too soon in celebrating its demise. As it turns out, when those with money (meaning the rich) are hurting, their pain is often transferred to those who need money even more.

In a New York Post story dated September 25, the proprietor of Soho-based Five Point Fitness spoke of his inability to attain financing for his popular workout facility. According to owner Kevin McGrath, “The guys [from the bank] said if this was a year ago, it would have been a slam dunk.” But as the Post story noted, as “the economy continues to tailspin, scores of small-business owners are struggling to get tightfisted banks to dole out loans for much needed expansion plans.”

It turns out McGrath is not alone. Four days later a Wall Street Journal account of major food franchisees found that they too are facing troubles with regard to finance. As the Journal put it, the tough financing environment for Panera Bread, Yum Brands and Sonic (employers of those who’d like to be rich one day) is “a sign of how the turmoil on Wall Street is spreading to large companies and small business owners.”

Seeking out other lower-income individuals impacted by problems on Wall Street, USA Today reporter Charisse Jones traveled to Greenwich Avenue in Greenwich (CT), a street famous for its fancy shops and restaurants. While it’s safe to say its shop owners and employees have traditionally earned microscopic fractions of what their customers have traditionally brought home, they’ve not been immune to the financial downturn that has plagued the elite of Greenwich.

Jose Candray, manager of Village Bagels in Greenwich told Jones that “tips are smaller” these days, while Greenwich resident (and investment banker) Bob Jermain referenced the fact that his kids no longer “need 20 sweaters”, which means sales at Greenwich Avenue clothing stores are set to fall. Are layoffs of the lower-wage workers these businesses employ not too far off?

It turns out yes, because as an October 14th USA Today story noted, with “stores doing all the cost cutting they can to preserve profit margins,” this “will mean fewer salespeople available to help shoppers.” It’s also notable that while those who make $100,000 or more only account for 10% of the U.S. population, according to a study conducted by the Harrison Group, those in the $100,000 income bracket account for 50% of retail spending.

The Harrison Group study dovetails well with a Bloomberg story from last month which detailed a looming financial shortfall when it comes to efforts “to combat hunger, poverty and disease.” Bill Gates was featured in the Bloomberg piece, and owing to his desire for “rich-world” governments to free up funds for poverty programs alongside his private efforts, Gates fears that “Rich-world budgets may not have room for increased generosity.”

The above is interesting when we consider whose economic efforts regularly fill rich-country coffers with so much cash. Not only do the rich account for the majority of retail sales, but as countless studies have shown, they similarly account for the vast majority of tax revenues taken in by governments. So if the economy continues to falter, tax authorities worldwide will collect less from the rich, and this will soon enough reveal itself through less in the way of government funding for poverty programs here and around the world. This is probably a good thing considering the persistent failure of government-led poverty initiatives, but the point is still valid.

A recent Washington Post story, “Crisis sparks search for new aid sources”, showed yet again how the poor hurt the most when the “dastardly” rich see their fortunes turn south. It turns out Lehman Brothers, as part of its expansive charity program, was until recently a $50,000 dollar donor to Habitat for Humanity. $50,000 may not seem like much, but those funds paid for the construction of over 100 one-room houses that put a roof over the heads of 500 citizens of New Delhi. According to the Post account, previously those 500 “had been living in shanties of tarpaulins and old clothes.” With Lehman no longer with us, it's fair to say that the beneficiaries of its charitable activities will have to get by on less.

Looked at from the perspective of private, non-charitable economic activity, an October 6 USA Today story wrote about taco vendor Jorge Flores in Nuevo Laredo, Mexico. While previously he would sell 300 tacos per day to laborers reliant on our robust economy, thanks to economic problems stateside, he now only sells 180. What’s that they say about a rising tide lifting all boats? A subsiding tide evidently lowers all boats if Mr. Flores's story is at all indicative.

More generally, in 2007 charitable donations from Americans hit a record of $300 billion. But a recent newspaper headline noted that “Nonprofits Brace for Slowdown in Giving”. Sure enough, nonprofits frequently only exist thanks to the generosity of the rich. And with the rich in many cases hurting in this uncertain economic climate, the ability of charitable organizations to continue their missions will be severely compromised.

What these various accounts tell us is that whether due to pure profit motive through which the rich supply capital to businesses, or through perhaps simple vanity that causes them to give to all manner of charities, it is thanks to the wealthy that job-creating businesses are funded, and it is also thanks to the rich that societal ills are addressed with ample funds.

So to deny the reality of trickle-down economics is the equivalent of denying that the sun sets in the west. It does, and trickle-down economics is. In short, politicians can dream up all sorts of tax plans and programs to harm the rich, but in doing so, they should make no mistake about who in fact will pay in the end.