From: "jim blair" Subject: Define TRICKLE DOWN ECONOMICS and give two examples Define TRICKLE DOWN ECONOMICS and give two examples. (from the famous question on the astronomy exam: define the Universe and give two examples). WHAT IS "TRICLENOMICS"? A short post from poulosio@delphi.com over a year ago asked: "Can anyone point to any nation or empire that implemented Tricklenomics and wealth actually trickled?" This generated several replies and an extended discussion, and several tables of statistical data were introduced to "prove" various claims mostly concerning recent US economic history. In reviewing the discussion I see two separate issues, and plan to treat them in two separate messages. PART I: What is meant (or at least what is commonly understood) by the term. And from that, what are examples that will be accepted by the parties to the discussion. In other words, let's see if we can agree about what we are talking about, and agree on specific examples. PART II: How to evaluate a specific example, or what I call the use and misuse of statistics. The earlier exchange generated a "textbook example" of the misuse of statistics about the recent US. And what should be the basis of comparison? Should one country be compared to another? Or one time period in history to another. More on this later. PART I Tricklenomics is not a defined word, but from context it is clearly intended to be an economic system where there is no significant barrier to the accumulation of wealth by individuals. Trickle Down Economics (TDE). From the old story that "if the horse has better hay to eat, the birds will eat better" (it being understood that birds eat manure). Reaganomics (to imply one example). If THE RICH do well, benefits will "trickle down" to the rest. Lower taxes on high income or capital gains will benefit most of the population, etc. NO ANCIENTS If this is what is meant by TDE, then most ancient societies cannot qualify. The mere existence of rich and poor is not enough. Egypt for example. The Pharaoh had vast wealth and power (comparatively speaking) but no slave building a pyramid could expect to become wealthy by working harder. Same lack of incentive exists in any society based on inherited position or land, which was most or all pre-industrial societies. Only with industry and commerce did it become reasonable for one born outside the ruling class to have the IDEA that they could climb above their "station in life". (even if, as the opponents of TDE claim the IDEA is a false hope) So I claim that only "modern" societies can qualify. But not ALL modern ones. Sweden in the 1960's had an income top bracket of 105% If a Swede with a high income were to be so foolish as to earn an extra krona (and the declare it as taxable income) the tax would be 1.05 krona. The US after WWII had a top bracket of 94%. NOTE ASIDE: high top brackets are not a certain disqualification since they may be only "cosmetic". It was so rare for anyone to actually pay the 94% top bracket that I can remember a time when some actually did, and it became a news item. (Except for poor Joe Louis, the boxer, who could never pay off his taxes--but that is another story) ONLY CAPITALISTS NEED APPLY And I would have thought it obvious that countries which declare themselves SOCIALIST would be disqualified. Equality for all should rule out some getting much more than the others. I was surprised when the original poster proposed India as an example, citing 40 years of TDE. He didn't say which 40 years, but I would not have been more surprised to have the Red China of Chairman Mao nominated. I say this because when I was a student at the UW in the 1960's the debate among the campus Left was which country was the MODEL FOR THE FUTURE: India (representing democratic socialism) or China (representing revolutionary socialism). It was taken for granted that the USA (representing capitalism) was over the hill and would soon collapse. And only a minority then backed the USSR (seen as bureaucratic socialism or as Stalinism). How strange it is to see India proposed as an example of TDE. To qualify as TDE a country must have either a low or flat rate tax on income or only a mildly progressive one (to insure that the RICH can continue to get richer, or to trick the poor and middle income people into THINKING they can get more and keep it). Let's say top rate of 30% or less. Then I nominate two candidates, both from the USA. ONE: the USA from the Constitution until WWI, when the top bracket jumped to 77%. As eflahert@garnet.acns.fsu.edu pointed out, wealth was concentrated in the hands of a few. There was no tax on income for most of that time, and a top bracket of 7% in 1913. If that is not TDE, then what is? REAGAN as a KEYNESIAN? Earlier, patrick@marl.research.panasonic.com objected to this example, claiming that it is an example of "Keynesian economics" rather than TDE. John Maynard Keynes published his General Theory of Employment, Interest and Money in 1936 and its main thesis was that the federal budget need not always be balanced. Indeed Keynes proposed that the federal government should run a deficit, especially during a recession/depression. He criticized earlier political leaders for their obsession with the BALANCED BUDGET . (The US government actually had a surplus every year from the end of the Civil War until 1894.) The Keynes view is not inconsistent with the policies of Reagan. Indeed, there could be an interesting debate on the proposition "Resolved: Ronald Reagan was the most Keynesian President in US History". At any rate Reagan can hardly be accused of being obsessed with balancing the budget. TWO: the USA during the Reagan Era (1981-89). Reagan lowered the top bracket to 28% (from an earlier 94% after WWII until JFK dropped it to 70% where it remained until 1982). The era ended with the 1990 "budget deal" that increased the top rate back above 30%. This is just an attempt to define the Question: PART II will be to evaluate candidate TWO. Assuming that this IS an example of TDE, did it "work", and what does that mean anyway, and can that be measured, and if so, how? A REPLY: JFK In reply to my TDE I post, came this from Prof A. R. Whitaker (whitaker@usna.navy.mil) In reply to Jim Blair's thoughtful challenge, I would like to give three-not two but three!- examples. The best example is President Kennedy's tax cut in the early 1960's. It is not fashionable or politically correct to call that trickle-down economics, but that's what it was. It was also supply-side economics, although Herbert Stein had not yet put the term into the language. Investment tax credits stimulated businesses to invest (remember, they didn't get a tax break unless they invested-or aren't you old enough to remember? :-)) in producing what they thought we wanted. In view of the fact that they are in business to make profits, and have learned how to do it, they invested wisely, so that spending, production, and employment increased. Thus did the handout to the rich result in a benefit which trickled down to the unemployed. Perhaps you also remember that after a couple of years, Congress killed the goose that had laid the golden egg and eliminated this shameful welfare for the rich- that is, they eliminated the tax break, catching many businesses only a year or two into five-year expansion programs. Many top management careers were destroyed by what proved to be the poor judgement of trusting Congress. Moving right along, let us consider President Reagan in a similar situation in 1981. He tried the same tactic, but it was slow in working because the top managers of the 1980's were the lower management of the 1960's who remembered all too well what had happened to their bosses a mere 20 years earlier. It's safe for a politician or a journalist to say that history is bunk, but when a business career lasts 40 years, it's better not to forget. (as an example: Our youngest son had finished a tour with the Marines and was working in industrial management for Honeywell. His plant was running 24 hours a day, but they were not considering expanding because they felt Congress would soon increase taxes and they would be stuck with idle capacity). If I have not succeeded in offending everyone in sight, let me for my third example go back to FDR and the NRA (NIRA). This particular bone- headed piece of trickle-down economics was supposed to work as follows. Monopolizing a competitive industry generates profits through output reductions and price increases. So- in a country of naked and starving unemployed- let us reduce output of food and clothing. The resulting profits to the industries involved will be invested in new capacity which will generate jobs and prosperity. Sure it will. Plough under every third row of corn, kill baby pigs, burn oranges while shotguns and guard dogs are used to repel hungry people. The idiots who thought this up are to this day called the BRAIN TRUST; and there wasn't an economist among them. President Clinton would understand that. Real experts keep telling you things you'd rather not hear. I didn't say my third example was a GOOD example, did I? PS FDR has to be the greatest leader we ever had. Washington and Lincoln? No. They did things right! But FDR did it wrong and still held us together! ---ARW. AND THIS COMMENT FROM DAERON Why not employ deficit spending as the late Nobel Winner Edward Vickrey advocated, and as JFK actually did - creating (in conjunction with his tax cut) the greatest era of post-war prosperity (for the *average* American) ever. As Kenneth P. O'Donnell and David Powers note ('Johnny- We Hardly Knew Ye', p. 477): "The combination of a budget debt and a reduction of the government's income seemed to be economic heresy, but Kennedy and the liberal economists saw it as a sophisticated move to increase the prodcutive power of our industrial society, which it did successfully, giving the United States in the 1960s the longest stretch of peacetime prosperity that the country had enjoyed since the boom days of the 1920s/" Calvin Cooledge: The First Trickle Down Guy? Reagan was not the first to try Trickle Down. After posting TDE I, I came across another not very well publicized example of TDE, also in the USA. After WWI the top income tax bracket was a high 73%. But the Revenue Acts lowered it to 25% in a set of reductions starting in 1921 and completed in 1926. This was done because it was argued that high taxes were restricting economic growth. Tax revenue surged during the 1920's from $719 million in 1921 to $1.16 billion in 1928, an increase of over 61%. This was a time of almost no inflation. This from Calvin Coolidge: (as taken from Jude Wanniski's Supply Side U lesson #6, Spring 1998) In my book, I quoted from Andrew Mellon’s best student, President Calvin Coolidge, who clearly helped his pupil write his February 12, 1924 speech to the National Republican Club in New York City. It appeared in Mellon’s book of the same year, Taxation, the People’s Business, which is a terrific collection of essays on taxation that is still available in better libraries, but which appears to be out of print. The proposed bill maintains the fixed policy of rates graduated in proportion to ability to pay. The policy has received almost universal sanction. It is sustained by sound arguments based on economic, social and moral grounds. But in taxation, like everything else, it is necessary to test a theory by practical results. The first object of taxation is to secure revenue. When the taxation of large incomes is approached with that in view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue. Experience is all in the other way. When the surtax on incomes of $300,000 and over was but 10 percent, the revenue was about the same as when it was at 65 percent. There is no escaping the fact that when the taxation of large incomes is excessive, they tend to disappear. In 1916 there were 206 incomes of $1,000,000 or more. Then the high rate went into effect. The next year there were only 141, and in 1918, but 67. In 1919, the number declined to 65. In 1920 it fell to 33, and in 1921 it was further reduced to 21. I am not making argument with the man who believes that 55 percent ought to be taken away from the man with $1,000,000 income, or 68% from a $5,000,000 income; but when it is considered that in the effort to get these amounts we are rapidly approaching the point of getting nothing at all, it is necessary to look for a more practical method. That can be done only by a reduction of the high surtaxes when viewed solely as a revenue proposition, to about 25 percent. I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden. If, on the other hand, the rates are placed where they will get the most revenue from large incomes, then the small taxpayer will be relieved. The experience of the Treasury Department and the opinion of the best experts place the rate which will collect most from the people of great wealth, thus giving the largest relief to people of moderate wealth, at not over 25%. The share of total taxes paid by "the rich" (income over $50,000 in those days) jumped from 44% in 1921 to 78% in 1928. This policy was reversed during the administration of Herbert Hoover who boosted the top rate to 63%. Of course the GREAT DEPRESSION followed during the decade of the 1930's. Some have claimed that the Boom times of the "Roaring '20's" caused the depression of the '30's. But many other explanations have been given as the cause of the depression: everything from long natural cycles and sun spots to the Smoot-Hawley tariff to the fall of the Bank of England. The stock market collapse of October 1929 is often cited as marking the start of the depression but few economists think it was the CAUSE. There had been many stock market "panics" before. But monetary theorists have given the money supply reductions that followed the market as being the major CAUSE of the depression. At any rate depression did not follow the TDE policies of the 1960's or 1980's. See also the file Hoover & FDR and the Great Depression ,,,,,,, ____________________ooo__(_O O_)__ooo_________________________ (_) Jim Blair (jeblair@facstaff.wisc.edu) University of Wisconsin, Madison (USA). For a good time, call http://www.execpc.com/~jeblair/ "This message is brought to you using biodegradable binary bits and 100 % recycled bandwidth."