The Trickle


Much of the debate surrounding free enterprise seems to come to whether or not trickle down economics works or not.

To assess the notion of trickledown economics versus more static economic strategies, one can review the example of the time it took to have PC’s and high bandwidth access to the internet all become quite available to a large percentage of the public.  Since the PC was first marketed in the 70’s or so, it took over 30 years for the scale to grow and the cost to reduce to the point where this was considered a commodity.  


Clearly the notion of the cost of various things dropping over time to a low value did take time.  The cost of a transistor now is virtually zero, and that progression took over 30 years.  With the cost approaching zero, companies like Intel have achieved great things. As Hard Drive storage also asymptotically ran towards zero companies like Google were enabled.  This also took close to 40 to 50 years from the time of the first manufactured integrated circuit.   This is in an arena which is highly free market.  In the general economy, there are some pockets that are more regulated and less appreciative of innovation.  Even with this general condition, the percentage of GDP spent on food dropped from 17% to 5% today.    The cost of lowering distribution and analyzing markets and needs in a more productive fashion did accelerate this cost reduction no doubt. 


So what is the time constant of progression whereby the increase in GDP is reflected in the enhanced living standards?  If the answer were based upon more competitive market sectors, one could surmise that all are much better off now then say in the ‘60’s.  Clearly this is the case.  


The 99% in this country are the 1%'ers elsewhere.

The entire issue is that there should be more trickle down of wealth than whatever occurs today.   The question could be rephrased to be:  at what rate could incomes at the low end increase and what are the forces or processes to improve or restrict this outcome?


Clearly in our times, skills matter and skills need to continue to be increased.  Public educational system performance is a negative in this regard.   If healthcare was more competitive and provided at a lower cost, this would have a two-fold effect upon salaries:  first, the take home pay would be larger by a considerable amount over time; and second, the cost of healthcare would be less.   Having more free enterprise would increase the trickle down in absolute terms.   The naysayers do not want to believe the basic reasons for our country to have the wealth to consider doing the things we do.   


Look Who’s Practicing Trickle-Down Economics:   Link

09/30/2012  Article by Warren Gibson on how tickle down was constructed by the left and then critiqued by the left.

Thomas Sowell is one of the clearest contemporary thinkers on economic and political issues, both as a theoretician and a commentator on current events. His recent piece on “Tax Cuts for the Rich and Trickle-Down Theory” is an excellent example. In it, he shows how tax rate cuts for the highest earners can actually increase the tax revenue collected from that group. He also recalls challenging his readers to name a single economist who advocated a “trickle-down” theory of economics. No one did so.


Trickle-down is the idea that when the highest income-earners keep more of their income, some of their spending will eventually reach lower-income workers. Their purchases of luxury items will bolster employment in the production of those items. Leftists are fond of setting up this theory and then attacking it on the grounds that the benefits to the wealthiest overshadow the benefits that trickle down to those at the bottom. Government spending cuts hurt low-income people the most. Therefore, they say, tax cuts for the highest earners are a disguised scheme to siphon yet more wealth from the bottom to the top.


The “trickle down” phrase has been around at least since the 1930’s and was restated recently by the current White House occupant when he attacked what he called “The economic philosophy which says we should give more to those with the most and hope that prosperity trickles down to everyone else.”


Does the theory make sense? First off, it ignores the morality of the situation. As T. J. Rodgers, CEO of Cypress Semiconductor, puts it, “I’m proud of my wealth. I earned it.” He explains how increased income taxes will not reduce his personal consumption but will instead reduce his investments in Silicon Valley startups and his charitable activities. Just what is the benefit, he asks, in taking money away from these uses and giving it instead to programs like Cash for Clunkers or Solyndra?


Secondly, trickle-down theory ignores the fact that high-income people like T. J. tend to invest a greater portion of their marginal income. Capital accumulation is the key to higher worker productivity and thus higher wages and higher standards of living.


There is actually one institution that does practice trickle-down economics. That would be the Federal Reserve System. The Fed recently announced its QE3 program under which it will purchase $40 billion of mortgage-backed securities each month for an indefinite period of time. One aim of this program is to push down long-term interest rates and thereby encourage businesses to borrow. But those rates are already historically low. Can we really expect further cuts to have any significant stimulative effect given the current high level of regime uncertainty?


The other purpose mentioned by Chairman Bernanke is to keep the stock and bond markets propped up.  The idea is to pump up the “wealth effect.”  This is the idea that when people who see increases in the market value of their holdings of investment or real estate, they will be more inclined to spend, even with unchanged income. Their spending will then trickle down into the economy. 

As an investor I ought to say thanks but as a citizen I would say to the leftists, look to the Fed to find a real example of exploitative trickle-down economics.



What do you think is relevant here?