Whether owing to the distributional effects of government pandemic policies, the recent victory of President-elect Joe Biden, or perhaps just to the hyper-politicization of the modern day, political speech is reacquiring the language accompanying a left turn in policy.

by Peter C. Earle

Although never absent from public discussion, there’s a newfound vigor to caterwauling against billionaires (who, it must be said, were almost entirely the beneficiaries of state lockdowns and expansionary monetary policy), lobbying for reparations, and endorsing other forms of social and economic “justice.”

These, one can be reasonably sure, will continue into and through Biden’s inauguration on January 20. And predictably, the perennial favorite “trickle-down”––usually paired with ‘economics’ or ‘policies’––is back in vogue.

While the term is typically traced back to the Reagan administration––more specifically, a comment made by then-Director of the Office of Management and Budget David Stockman to William Greider at The Atlantic––it goes back far further than that. In his 1896 “Cross of Gold” speech, William Jennings Bryan said, 

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.

Over three decades later, in the depths of the Great Depression, the humorist Will Rogers wrote,

This election was lost four and six years ago, not this year. [Republicans] didn’t start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow’s hands. They saved the big banks, but the little ones went up the flue.

And there have been subsequent references to economic benefits “trickling down” to the masses by many other political and media figures: Lyndon B. Johnson, Arthur Okan, Hank Brown, and so on. Failure may be an orphan, but fallacies are propounded en masse.

More Holes Than Swiss Cheese

There are three major points to make about the bogey of “trickle-down” economics, theory, or policies.

First, and least important of all: the very choice of the word “trickle,” defined as a small, thin and/or gentle stream––as opposed to synonyms like ‘flow’ or ‘spill’––carries a disdainful, incidental, or even accidental air. 

Second, no political party, economist, or economic textbook has ever referred to “trickle-down” anything as a policy tool or outcome. As Thomas Sowell wrote in 2014: “The “trickle-down” theory cannot be found in even the most voluminous scholarly studies of economic theories – including J. A. Schumpeter’s monumental ‘History of Economic Analysis,’ more than a thousand pages long and printed in very small type.” It is a description typically employed by opponents of free markets and economic liberty, and one which like so many others (“fairness,” “hard-working Americans,” “equality“) has become so freighted with political suggestion as to become a near-metonym. 

Most important of all, the phrase fails to accurately describe any economic phenomenon or outcome. “Trickle-down economics” is, beyond being a phrase used to evoke an emotional reaction among a certain sector of the populace, a profound illustration of economic ignorance. 

It suggests, of course, that a particular political initiative results in huge benefits bestowed upon the wealthy, with ancillary benefits––if any––dripping down in tiny rivulets to the poor, the working class, minorities, women, and so on. Yet no policy, or law, or executive order, or other such initiative is so pliable and targetable. In every such case, there will always be those who benefit unintentionally (receiving far more than the purported “trickle”), and those who, owing to unique circumstances or the dumbest luck, are passed over by the bounty.

(“Supply-side” is not, other than in the mouths of demagogues, a synonym for “trickle-down.” Supply-side policies, in their most basic iteration, seek to reduce taxes, regulations, and other fetters on commercial activity across the board.)

Further, as a class warfare dog whistle, it deeply (and not coincidentally) confounds the way that the economy works, insofar as capital and labor are concerned. Setting aside corporatist cases, entrepreneurs and other innovators are overwhelmingly paid second, after workers. Their compensation comes on the back-end, so to speak, in the form of revenue, dividends, and/or rising market valuations. It would more accurately be said that earnings trickle up: Labor and managerial staff are paid first, without incurring risk or providing an entrepreneurial vision. Workers make the conscious decision to trade the inevitably stressful and highly unlikely (but, if realized, formidable) wealth creation potential of entrepreneurship for the certainty of wages, set hours, specific job descriptions, and union protections.

If slathering the rich with benefits in order that some might dribble down to the middle class and poor were actually the goal, as Sowell also commented, why involve a middleman? Politicians, especially in a democracy, benefit from currying favor with the thickest proportion of the wealth and income bell curve. They would most assuredly prefer, and choose, to deliver redistributive benefits directly to the masses than to a tiny sliver of the wealthy. It doesn’t happen, and it doesn’t make sense, because it simply doesn’t exist. 

Lockdowns Aren’t a Strawman; “Trickle-Down Economics” Is

People aren’t made wealthy by making the rich richer, and no (serious) economist has ever said so. Wealth is grown by what has been said, and is easily demonstrable: Economic growth benefits everyone, from the rich to the poor, from entrepreneurs to labor. 

Consider an argument made recently: that some of the super rich could give a few thousand dollars to every citizen while still remaining well within the top 1% of the wealth quantile. Setting aside issues of property rights and equity (and where confiscation is being recommended, to the Constitutional prohibition of Bills of Attainder), the benefits of competition, innovation, productivity, and other products of the market economy vastly outweigh a few thousand dollars for most citizens. Amazon has thrust the prices of goods and services down markedly over the last ten years while mostly negating costs associated with both physical shopping and shipping. Technology costs, for both hardware and software, have plummeted. Constant competition between Walmart, Target, and Costco benefit the poor and middle class vastly more than the wealthy. The list goes on. 

Many of the poor, understandably, think of wealth in terms of what’s in their bank accounts, how much they have left after paying bills, and so on. But a huge component of rising prosperity is savings: falling prices owing to rising efficiencies and productivity. And a component of rising or enduring high prices, simultaneously overlooked, is monetary policy and regulatory hurdles. Better economic education, and not platitudinous myths, are needed.  

Over the past quarter century, more than one billion people in the United States and the rest of the world have been lifted out of extreme poverty; billions more have seen their standards of living rise by significant degrees: less a trickle than a deluge, and certainly not a crafted (or craftable) government prescription. It is a trend which has nothing to do with “trickle-down” schemes or redistributive policies. Rather, several decades of economic liberalization, from which higher levels and rates of economic growth proceed, has been the source. To foster the continuation of that course, all that is required is unfettering people’s imaginations, talents, and access to resources by removing artificial barriers. 

And, along the way, putting hackneyed economic concepts to rest.   

Peter C. Earle is an economist and writer who joined AIER in 2018 and prior to that spent over 20 years as a trader and analyst in global financial markets on Wall Street. His research focuses on financial markets, monetary issues, and economic history. He has been quoted in the Wall Street Journal, Reuters, NPR, and in numerous other publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point. Follow him on Twitter.