Trickle Down Economics: Why It Doesn’t Work [Opinion]

We haven’t seen Trump’s plans for taxation come to the forefront yet, but we do know that Donald Trump wants to practice trickle down economics — the economic voodoo, as George H.W. Bush put it, which Reagan brought to prominence in 1980. CNBC reported last month that Trump wanted to enact such tax policies by lowering taxes on those with the highest incomes and cutting the corporate tax from 35 to 10 percent. The delay comes from tariffs, which Trump wants to introduce, and Congressional Republicans disapprove of.

However, trickle down economics did not work when Ronald Reagan came along, nor will they work today.

The basic idea of trickle down economics — also known as supply-side economics, since it is based upon helping corporations deemed the producers — is that companies do not have enough money to invest with because of taxes. However, if we cut taxes for them, they’ll have enough money to invest in growth and they’ll hire more workers, and thus the benefits trickle down to regular people.

Capitalists are capitalists either because they benefit from capitalism, or they fundamentally do not understand it. Socialists, like me, understand capitalism and how it works. The truth is that the basic premise, that the rich and corporations do not have enough money to invest, is ludicrous. Corporations are making historic profits — made of money they choose to not reinvest. After all, if they reinvested it, it would end up in expenses either in that year or the year after, yet year after year American corporations are making record profits. Fortune listed the most profitable companies in 2015 this past June. Apple topped the list with $53.4 billion. The previous year they were the most profitable as well, with $39.5 billion. Apparently that was up 6.7 percent from the year before.

Ronald Reagan with Margaret Thatcher

Why is Apple making so much money that they post record profits year after year after year? Because they are not reinvesting their income into growing the business and creating jobs — they have enough money to do that without tax breaks. In fact, following the graph from Trading Economics, you can see that corporate profits have exploded since Reagan’s presidency. That is more and more money that corporations have chosen not to reinvest in the company, but rather pay out to shareholders.

Meanwhile, the New York Times reported in 2014 that corporate profits were at their highest level in 85 years, while worker compensation was at its lowest level in 65 years. Clearly, the money wasn’t trickling down to the average folks, the workers, and less was trickling down than before.

As a side note, this is a great reason why measuring economic health via NASDAQ and the Dow Jones is a nefarious scheme. President Obama touted that he was aiding those numbers while ignoring the numbers that affected average Americans directly. Rather, these numbers are a better measure of the exploitation of workers rather than their economic stability.

Similar patterns have happened with income and wealth disparities. Mother Jones reported in August on just how much that has grown over the years; the top 10 percent have an average of $4 million in wealth (the ones they want to invest their money are skewing that figure with many more millions in wealth than someone at the 90th percentile) while the rest of us get saddled with debt. The wealthy, or the “job creators,” have no shortage of money with which to invest and create more jobs.

In fact, the reason the Federal Reserve sets interests rates so low is to try to force people to invest money rather than sit on it. And push we’ve had to do. Going back to Trading Economics again, we see an overall trend of interest rates plummeting since 1980 as the rich have had way too much money to successfully invest. A high nearing 20 percent before Reagan took office (8 percent is more normal to the period prior to him) to nearly zero today. Why would we need to be so aggressive in forcing people to invest their money rather than sitting on it if they didn’t have enough to invest?

Alan Greenspan

The basic premise of trickle down economics is wrong; there is plenty of money to invest which is not invested. Basic capitalist economics will tell you that supply is coupled with demand; if supply-side economics won’t work, perhaps demand-side economics will. So, rather than worry about the welfare of corporations and the super-rich, we should concern ourselves with the welfare of the common consumer: your average American.

The rich have plenty of money to blow on what they can consume and then plenty more to blow on things the rest of us couldn’t dream of being able to do. They can drop millions of dollars on pieces of art produced by long dead artists and large trust funds. If you want to get them to invest it, you can either make it less beneficial to sit on that money — as we have for the past 35 years — or you can make their investing more profitable. In fact, they sit on that money at near zero percent interest rates, well below inflation, because people aren’t going to buy products.

Those of us who aren’t super rich, who are saddled with debt, do not have disposable income to spend on new products or even greater proportions of existing products. Why would the rich want to invest in making more products if those products are going to sit on the shelves and never get sold? Due to rising debt and dropping wages — real wages — we cannot afford to buy those products. However, if you give someone with little disposable income more income, perhaps through higher wages or through benefits such as unemployment benefits, welfare benefits, foodstamps, or even tax cuts, they will spend that money and spend it fast. The rich don’t need to spend money, but the poor need to spend money they don’t have.

And yes, government spending is vital for this. Corporations do not look out for the big picture of the economy, they are looking out for their own profits, which means paying as little as possible for as much labor as possible. They aren’t going to raise wages to make the economy work; the government has to take action in one form or another to get it stimulated.

When the working class has more money on a constant basis, it generates demand, which requires more production and more services meaning that corporations then have an actual need to invest that money into growing their business, to make even more money off of that growth in demand. Economic growth doesn’t come from the rich investing, it comes from demand driving them to invest that money. The people at the bottom of the economic system are the roots of the system and it takes watering those roots to make the entire system grow. Give money to those at the bottom, not those at the top. You water the roots, not the leaves.

As I said, capitalists do not understand how capitalism works, and they do not understand market forces, socialists do. It is that understanding of market forces that leads the socialist to reject capitalism. In the coming months, when this debate explodes into the forefront once again, let us remember that trickle down economics does not work, because it does not understand how capitalism works.

[Featured Image by Chip Somodevilla/Getty Images]