Split Thread Trickle-down economics

[lomiller]

I don't buy into the notion that monetary policy is generally a superior tool. Why would you think that? They are different tools, and so are their (direct and indirect) effects on the economy.

When you have multiple tools one is almost always superior to the others for specific situations. Delays in enacting stimulus, potential political interference, creation of public debt, assessing how much stimulus to apply, inefficient decision making about how, where to apply stimulus, and more all favor using monetary policy over fiscal policy.

What I primarily want from government is a long term plan on what services it’s going to provide, a long term plan on how to pay for those services. I don’t want either of those plans changed up on the fly to respond to short term economic conditions that the Central bank is perfectly able to deal with. Such changes can only lead to wasting money on services we didn’t really need or falling short on the tax revenue needed to pay for them. This type of stability not only benefits people who use those services but the suppliers who provide them.

If you hit one of those special cases where Monetary Policy struggles to address the needs then sure, step in with some fiscal policy, otherwise stick to supplying and paying for government services.

 

[lupus_in_fabula]

If you hit one of those special cases where Monetary Policy struggles to address the needs then sure, step in with some fiscal policy, otherwise stick to supplying and paying for government services.

Well, for example, increasing unemployment during a downturn is by no means a special case. Yet that is often something which we can alleviate with fiscal policy more forcefully than with monetary policy. And furthermore, empirically, we often find firm's investment decisions to be insensitive to changes in interest rates – which, after all, is the main monetary policy lever.

 

[lomiller]

Well, for example, increasing unemployment during a downturn is by no means a special case. Yet that is often something which we can alleviate with fiscal policy more forcefully than with monetary policy.

You can’t have meaningful reductions in unemployment during a downturn because it’s part and parcel of the downturn. When the downturn is over employment recovers, and in most cases by the time a fiscal stimulus could be properly planed, brought into law and implemented this recovery is well under way.

Since 1979 there have been 5 recessions.
2 in quick succession in 1980 and 1981, that were a direct result of reigning in inflation. With that goal in mind either fiscal or monetary stimulus would have been counter productive.
The 2008 recession caused by the housing crisis and freeze up of lending markets, and IMO an actual use case for fiscal stimulus
2 short 8 month recession that would have been over long before fiscal stimulus could have been put into action. They may have even been over before they could be formally identified.

empirically, we often find firm's investment decisions to be insensitive to changes in interest rates – which, after all, is the main monetary policy lever.

All this means is that the cost of money is normally well below the return most companies are seeking on their investment. IOW there is sufficient capital available for investments, so tax cuts aimed at stimulating investment by making more available would not be effective either. In practice all it would take is some companies to be sensitive to the cost of money. Lower interest rates, however, also stimulate demand, something tax cuts to the wealthy do not do.

 

[McHrozni]

More investment > more inflation > higher interest rates > less investment. The cycle is controlled elsewhere. The only purpose it serves is to redistribute wealth from the middle class to the wealthy.

The balance is recreated, but at a higher level of overall economic activity. It doesn't drop back to the original level or else the reverse would happen anyway.

This falls under “not even wrong”.
The incentive to invest comes from receiving a greater rate of return than not investing.
The ability to invest comes from having money in the economy that can be used for investment, which is ultimately controlled by the Fed.

Neither the incentive to invest nor the ability to invest are binary, they don't either exist or don't exist. The incentive to invest and the ability to invest are present in any individual and in any economy, including hunter-gatherer groups and North Korea. The amounts you can invest may be tiny, what you can invest may be unorthodox (a few minutes of labor to make that tool a bit better so you can produce a bit more of whatever) and the return on investment may make the exercise pointless, but it's not that it either exist or it doesn't.

Trickle-down approach increases both incentive and ability to invest. If either is a bottleneck the system may be beneficial, if both are it is worthwhile to seriously look at it. You don't dismiss a system just because it's unsuitable for economic conditions you don't have.

You don’t always want more investment, and it leads to bubbles, overcapacity and recessions.

How many times have I pointed out trickle-down economics can only work in situations with low investment, where low investment is a bottleneck of economic growth? Three times? Four?

So yeah, thanks for pointing this out. It was very helpful.

It’s not just the wealthy that invest. Residential real-estate, retirement plans education plans and straight up equities/bond investments from the middle class are a huge part of US investments.

Investment overall is not a bottleneck in the US, I don't see why you keep bringing it up. I said repeatedly trickle-down can work in a specific set of circumstances and singled out US and UK as two countries where it certainly can't work. This is one of the reasons why.

McHrozni

 

[lupus_in_fabula]

You can’t have meaningful reductions in unemployment during a downturn because it’s part and parcel of the downturn. When the downturn is over employment recovers, and in most cases by the time a fiscal stimulus could be properly planed, brought into law and implemented this recovery is well under way.

It's not so much about getting employment back up during downturns as it is about preventing a deeper fall in aggregate demand leading to further losses of job- and business opportunities. It's thus exactly during a downturn where fiscal policy is the most effective. It's just that we for some reason tend to forget automatic stabilizers being part of the fiscal policy framework and only notice discretionary measures.

All this means is that the cost of money is normally well below the return most companies are seeking on their investment. IOW there is sufficient capital available for investments, so tax cuts aimed at stimulating investment by making more available would not be effective either. In practice all it would take is some companies to be sensitive to the cost of money. Lower interest rates, however, also stimulate demand, something tax cuts to the wealthy do not do.

Investments tend to react to aggregate demand and capacity utilization levels, thus changing rates cannot be the main tool unless the situations is sufficiently sensitive – which usually isn't the case during downturns. However, that is not to say it cannot alleviate and affect financial conditions in some direction.

 

[Sceptic-PK]

You know what is the biggest driver of deficit?

Yes. Tax cuts, wars and financial crises.

https://www.cbpp.org/research/econo...es-continue-to-drive-large-projected-deficits

 

[The Great Zaganza]

Yes. Tax cuts, wars and financial crises.

https://www.cbpp.org/research/econo...es-continue-to-drive-large-projected-deficits

interesting.

thanks for the link!

 

[lomiller]

The balance is recreated, but at a higher level of overall economic activity. It doesn't drop back to the original level or else the reverse would happen anyway.

Nope. A big part of the Feds job is to stomp out increased growth until you no longer have inflation. You can’t get to a higher level of economic activity without first having higher growth. Again, with just a few exceptions the Fed is already creating the highest level of growth and economic activity practice, without causing undue inflation.

There is nothing you could do with tax cuts to the wealthy to create more economic activity that could not be done more effectively by the Fed. The limit is how much economic activity you can have without inflation not how much the Fed can create. lupus_in_fabula’s argument that there are things you can do with other forms of stimulus to increase demand is more compelling (and valid), but IMO is still limited to a relatively small number of use cases in developed economies.

Investment overall is not a bottleneck in the US, I don't see why you keep bringing it up. I said repeatedly trickle-down can work in a specific set of circumstances and singled out US and UK as two countries where it certainly can't work.

Investment is almost never a bottleneck with a well run central bank. You are also missing the point that even if do for some reason need to encourage investment, that investment doesn’t need to come from the wealthy, in fact I’d argue it’s better off coming from the middle class. If you have extraordinarily high top tax rates, cuts to those top tax rates can be effective but AFAICT this is mostly a theoretical exercise as no one has tax rates this high.

 

[Fast Eddie B]

I just wanted to thank everyone for an informed discussion on this topic.

 

[lomiller]

It's not so much about getting employment back up during downturns as it is about preventing a deeper fall in aggregate demand leading to further losses of job- and business opportunities. It's thus exactly during a downturn where fiscal policy is the most effective.

Reduced employment is part of what defines a downturn, so if you are creating net employment you are not in a downturn. It’s also a lagging indicator so you can already be in recovery even if employment has yet to recover, at which point further stimulus runs the risk of creating instability.

Investments tend to react to aggregate demand and capacity utilization levels, thus changing rates cannot be the main tool unless the situations is sufficiently sensitive – which usually isn't the case during downturns. However, that is not to say it cannot alleviate and affect financial conditions in some direction.

Agreed. You won’t get new investment as when there is already excess capacity. This is one of my criticisms of trickle down. F

thus changing rates cannot be the main tool unless the situations is sufficiently sensitive – which usually isn't the case during downturns.

Lowering the cost of money increases demand as well as making investment more attractive. Outside of deflationary situations where real interest rates have dropped to near zero, the economy will be sufficiently sensitive for Fed actions alone to deal with a downturn.

It's just that we for some reason tend to forget automatic stabilizers being part of the fiscal policy framework and only notice discretionary measures.

There is “hidden” fiscal stimulus and a great deal of stability granted by keeping government spending constant during a downturn. Constant spending along with reduced tax revenue due to the recession creates short term deficits and a form of stimulus. The danger with stimulus (or austerity) is that if miss-applied it creates instability if applied at the wrong time or in the wrong place in the economy. Applied to late it can cause the recovery to overshoot and dealing what that can send you back into recession. Applied to the wrong part of the economy (eg the Bush tax cuts in 2001) it can create asset bubbles in that part of the economy.

 

[lomiller]

Yes. Tax cuts, wars and financial crises.

https://www.cbpp.org/research/econo...es-continue-to-drive-large-projected-deficits

New programs without new taxes to fund them or cuts to existing programs also played a role. If you are going to spend $250 million a year on Medicare Part D it needed to be pair for either with increased taxes or decreases in some other program. The problem is the only programs big enough to cut that much from are Military, Medicare/Medicaid and Social Security, all things rank and file Republicans don’t want cut.

 

[Sceptic-PK]

New programs without new taxes to fund them or cuts to existing programs also played a role. If you are going to spend $250 million a year on Medicare Part D it needed to be pair for either with increased taxes or decreases in some other program. The problem is the only programs big enough to cut that much from are Military, Medicare/Medicaid and Social Security, all things rank and file Republicans don’t want cut.

Yeah, CBPP note that they deliberately excluded the pharmaceutical subsidy from their modelling.

(The Medicare prescription drug benefit enacted in 2003 also will substantially increase deficits and debt, but we are unable to quantify these impacts due to data limitations.)

 

[Brainster]

How does it work exactly?

The argument is that cutting taxes on the wealthy encourages them to invest the money in productive, income-generating opportunities. The availability of seed capital means that more new businesses can get the investment they need to grow and profit. Also, lower tax rates encourage more risk-taking by investors, as more projects meet investment requirements. All of this leads to greater economic growth for the economy, which in general leads to greater prosperity for all.

None of this is particularly controversial among economists and finance people. Obviously there are other priorities for the tax system, but it is hard to argue that lower tax rates would not in general have the effect of increasing economic activity.

 

[McHrozni]

Nope. A big part of the Feds job is to stomp out increased growth until you no longer have inflation. You can’t get to a higher level of economic activity without first having higher growth. Again, with just a few exceptions the Fed is already creating the highest level of growth and economic activity practice, without causing undue inflation.

There is nothing you could do with tax cuts to the wealthy to create more economic activity that could not be done more effectively by the Fed. The limit is how much economic activity you can have without inflation not how much the Fed can create. lupus_in_fabula’s argument that there are things you can do with other forms of stimulus to increase demand is more compelling (and valid), but IMO is still limited to a relatively small number of use cases in developed economies.

It depends on your tax structure. If the rich are taxed at punitive rates (e.g. 80% or above) then cutting their taxes would create strong incentive as well. You seem to be fixated on the US for some reason. It's not the only country in the world and I specifically stated several times trickle-down economics is a bad idea for US in any of its iterations.

Investment is almost never a bottleneck with a well run central bank. You are also missing the point that even if do for some reason need to encourage investment, that investment doesn’t need to come from the wealthy, in fact I’d argue it’s better off coming from the middle class. If you have extraordinarily high top tax rates, cuts to those top tax rates can be effective but AFAICT this is mostly a theoretical exercise as no one has tax rates this high.

Not currently, because we all realize having taxes so high it stiffles investment is a horrible economic policy. In other words, because we realize trickle-down economics work to such an extent we allow the rich to become richer in order to improve our economy overall.

I'd like to use this opportunity to explain there has rarely been an exercise when a country fully adopted one of the named economic policies and adopted it to the fullest possible extent. Even under trickle-down ideology of Regan, US still had an array of public welfare schemes which run in the face of trickle-down theory. Even North Korea always had private investment, it may have been mostly in the form of 14 year olds selling lemonade at sidewalks (or North Korean equivalent), but it was never a 100% pure state-run economy. Pure economic systems are hard to obtain and as such rare if they exist at all since the industrial revolution. They're also uniformly bad.

McHrozni

 

[Tippit]

The argument is that cutting taxes on the wealthy encourages them to invest the money in productive, income-generating opportunities. The availability of seed capital means that more new businesses can get the investment they need to grow and profit. Also, lower tax rates encourage more risk-taking by investors, as more projects meet investment requirements. All of this leads to greater economic growth for the economy, which in general leads to greater prosperity for all.

Except, the economy isn't suffering from a lack of liquidity. Thanks to fraudulent central banks the world is awash in liquidity. The problem is that the money has been used to bid up asset prices, making bond and shareholders substantially and arbitrarily wealthier, while seeing little to no actual capital investment in favor of massive share buybacks.

None of this is particularly controversial among economists and finance people. Obviously there are other priorities for the tax system, but it is hard to argue that lower tax rates would not in general have the effect of increasing economic activity.

Trickle down economics doesn't just argue for lower tax rates (which i think would be a great thing), it's an argument for *regressive* tax rates, ie: lower tax rates for the rich. Regardless of the effect that lower tax rates for the rich have on capital formation, the first priority of tax policy should be fairness, above all. Who is to say that a worker can't or shouldn't save a portion of their income in order to form a small business in the future? If they're paying a higher rate than the rich, then not only will it preclude this small business from starting, but it's patently unfair.

Despite how I feel about Warren Buffett, his secretary should, under no circumstances, be paying a higher rate than he does. The government has no business incentivizing capital investment over consumption, regardless of the purported economic benefits, because it's simply not fair. What I do with my income is my business, whether or not I consume it, invest it in the public stock market, or invest it in the real economy.

 

[The Great Zaganza]

Trickle-down is basically supply-side economics, which supposes that purchasing power is not the limiting factor.
Looking at US consumer debt, this assumption is obviously not correct.

 

[Henri McPhee]

The problem with all this theoretical economics is that poverty is still a crime.

Murdoch has been talking for years in his media outlets about scroungers and the cause of unemployment being lazyitis, and conspiracies don't happen. It ignores the fact that say somebody who thinks they are being bugged becomes unemployable and then loses dogged perseverance. Job centres don't offer people jobs to be refused. This recent Universal Credit policy in the UK is expecting many people, including the disabled, and mentally disabled, to live on air thanks to the No Social Security, and who cares, and tax cuts for the rich political parties.

There is a bit about this sort of thing in a book called Modern Money and Unemployment written by Isidore Ostrer published in 1964:

The idea of giving something for nothing to holders of equity in order to increase the number of those who may now believe that a Tory capitalist state is a very pleasant idea is something that should be quickly squashed as this can lead only to disaster.

This is not a criticism of the Tory or any other political party or individual.

For the public to be made to believe that all you have to do is to buy equity shares with a fair certainty of a capital profit arising from greater total purchasing power annually, but with its concomitant whittling away of fixed interest values, fixed incomes, pensions etc., is a monstrous and dangerous policy. It should be self-evident that any capital profit has to be paid for by others.

 

[The Don]

The problem with all this theoretical economics is that poverty is still a crime.

That sounds more like hyperbole and rhetoric than a statement of fact to me. For sure there are sections of society and the media who like to portray those who are less well off as being lazy but AFAIK poverty itself has not been criminalised in any modern developed economy - and especially not in the UK.

Indeed in the UK there is a long and shameful history of splitting the poor into the "deserving poor" who will be in receipt of welfare and/or charity and the "undeserving poor" who only get rebuked. That indicates that poverty itself is not necessarily the key criterion, but rather some subjective value judgement based on some, undisclosed criteria

Murdoch has been talking for years in his media outlets about scroungers and the cause of unemployment being lazyitis, and conspiracies don't happen.

Please see m earlier comments about deserving/undeserving poor.

The second party of this sentence seems to be a complete non-sequitor

It ignores the fact that say somebody who thinks they are being bugged becomes unemployable and then loses dogged perseverance.

I agree that mental health issues are poorly handled in the UK. A history of mental health issues is far more of a barrier to employment than a history of physical health issues - and IMO the NHS has proportionately far fewer resources to tackle mental health issues than physical health issues.

That said, I cannot see how this relates to the effectiveness, or otherwise, of trickle-down economics.

Job centres don't offer people jobs to be refused.

....as long as these people wish to continue to receive out of work benefits.

That said, I cannot see how this relates to the effectiveness, or otherwise, of trickle-down economics.

This recent Universal Credit policy in the UK is expecting many people, including the disabled, and mentally disabled, to live on air thanks to the No Social Security, and who cares, and tax cuts for the rich political parties.

Who cares ? Judging by their response, pretty much every other political party apart from those on the right wing, all kinds of advocacy groups and the majority of the British public (if opinion polls are to be believed).

 

[Henri McPhee]

It's more like trickle up economics than trickle down economics.

 

[Henri McPhee]

17 out of 27 libraries in Bristol, UK, are to be closed to pay for tax cuts for the extremely rich, and trickle down economics. The same thing seems to be happening in America with behaves just like a chump, Trump. I don't think it's equitably administered.