Restating the case against trickle down (updated in response to comments)

by John Quiggin on September 2, 2017

I’ve just given a couple of talks focusing on inequality, one for the Global Change Institute at UQ, following a presentation by Wayne Swan and the second at a conference organized by the TJ Ryan Foundation (including great talks by Peter Saunders, Sally McManus, and others), where I was responding to a paper by Jim Stanford from the Centre for Future Work. Because I was speaking second in both cases, I didn’t prepare a paper or slides, but tailored my talk to complement the one before. That can be a high risk strategy, but in this case, I think it worked very well.

It led me to a new, and I hope improved, statement of the case against ‘trickle down’ theory. As always, the most important part of a refutation is a clear statement of the theory you propose to refute, so that it can be shown where it falls down. After the talks I wrote this up, and it’s over the fold. Comments and constructive criticism much appreciated.

The case against trickle down, restated

The trickle down theory relies on the following claims*

1. In the absence of taxes and other government interventions, high market incomes reflect, and elicit, high productivity, investment and effort.

2. More effort from highly productive workers and investors increases the productivity of workers in general.

The trickle down argument then starts with the claim that reducing tax on high income earners will lead them to work harder and invest more. Since they are (by claim 1) the most productive members of the community, their efforts will (by claim 2) make everyone else more productive, and will benefit consumers. So, reducing taxes on high income groups will make everyone better off.

Claim 1 is a restatement of the marginal productivity theory which is at the heart of neoclassical economics. In a general equilibrium model of a perfectly competitive economy with full employment, it can be deduced as a theorem. With constant returns to scale,

Claim 2 is generally assumed to be true, although it’s not usually spelt out. It is true either if there are external economies of scale such as information externalities (the most productive provide a model for others to copy) or complementarity in production (working with highly productive colleagues and managers makes people in general more productive). With economies of scale, Claim 1 needs to be interpreted carefully, The implication is not that everyone receives a payment equal to their marginal product, but that market incomes are (roughly) proportional to average and marginal productivity.

If Claim 2 doesn’t hold then all the benefits of increased effort from highly productive workers and investors is captured by the workers and investors themselves. This means that the there is no ‘trickle down’ except through the tax system. The policy implication is that tax rates for high income earners should be set at or near the top of the ‘Laffer curve’ where revenue is maximized, estimated by Piketty, Saez and Stantcheva at around 80 per cent.

The neoclassical model that gives rise to Claim 1 has never been a fully accurate representation of the economy. But it is even less accurate now than in the past. The crucial recent developments, likely to continue in the absence of radical policy change, are:
(i) wage stagnation, with the result that the link between productivity and incomes has been broken for workers as a group
(ii) the increasing proportion of profits derived from monopoly power and financial sector speculation
(iii) the rise of the information economy. Information is a public good, so imposing explicit prices on information or bundling it with undesired advertising reduces its social value
(iv) the likely emergence of a patrimonial society in which high incomes are derived from inherited wealth

These developments mean that cuts in the top rate of income tax will primarily reward ownership of capital, unproductive activity, or luck in choosing ones parents, rather than increasing productivity. They also undermine the second proposition underlying trickle down theory. The pursuit of monopoly profits (‘rent-seeking’ in the jargon of free-market economics) reduces rather than increases the productivity of the economy as a whole.

That’s the theory. The empirical evidence, which was in dispute for a long time, is now clear-cut, at least for the United States. Decades of pro-rich policies have, unsurprisingly, made the rich much richer. Contrary to the predictions trickle down theory, the result has been to reduce, rather than increase, the productivity and dynamism of the economy. The combination of slower growth and increased inequality implies, as a matter of arithmetic, that the majority of the population must be worse off.

*There are some other versions of trickle down that can be dismissed more easily. Most notably, there’s the idea that the spending of the rich will create employment. That’s true, but more employment would be generated if income were redistributed to the poor, who save less of their income and consume more.

{ 56 comments }

1

BruceJ 09.02.17 at 1:51 am

Claim 1 is a restatement of the marginal productivity theory which is at the heart of neoclassical economics. In a general equilibrium model of a perfectly competitive economy with full employment, it can be deduced as a theorem.

Honestly, this makes ‘neoclassical economics’ some suspiciously like yet another perpetual motion scheme.

2

BruceJ 09.02.17 at 1:52 am

“Honestly, this makes ‘neoclassical economics’ some suspiciously like yet another perpetual motion scheme”

Sound! “sound like a perpetual motion scheme”. My kingdom for an edit button!

3

mclaren 09.02.17 at 2:02 am

We can also cite the exponential growth of share buybacks to boost stock prices and thus enrich CEOs + corporate officials with stock options. This now seems to be the main corporate use for profits, as opposed to investment. This trend would seem to short-circuit the whole argument in claim 1, since if businesses use profits to buy back shares instead of investing to increase productivity, claim 1 is entirely moot.
See “Profits Without Prosperity” by William Lazonick, Harvard Business Review, 2014. https://hbr.org/2014/09/profits-without-prosperity

4

Wally 09.02.17 at 2:13 am

“2. More effort from highly productive workers and investors increases the productivity of workers in general.”

What, people claim this? With a straight face?

I work in a factory. I’d say the opposite is true, the harder I work, the more everyone else slacks off!

5

OldClark 09.02.17 at 2:48 am

Tinkle down theory: We must coddle the rich, because if we don’t, then they will have a sad and won’t work hard. But the poor? Anything they get makes them work less hard.

But maybe: Tax the rich harder and they work harder, because they still want more, more, more. And the poor? Anything they get empowers them, and further motivates them to escape poverty.

6

Ian Maitland 09.02.17 at 2:48 am

“The empirical evidence [against trickle down theory], which was in dispute for a long time, is now clear-cut, at least for the United States.”

I wonder if the clause tacked on to that sentence — “at least for the United States” — isn’t a dead giveway?

What about the rest of the world? True, globalization enriched corporations and created Third World billionaires, but the most striking development of the two or three decades up to 2007 was the transformation of the situation and prospects of the world’s poor. 2015 economics Nobelist Angus Deaton has said: “Life is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.”  Between 1970 and 2006, the percentage of the world population in poverty has fallen by 80 percent from 27% to 5%. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. At the same time, various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145% (Pinkovskiy.& Sala-i-Martin 2009; see also Kinley, 2009: 14-15).
 
It is amazing how we take for granted what in retrospect will be seen as a golden age. How quickly we have forgotten how, before globalization, much of the Third World had been written off by experts. In the 1960s and 1970s, for example, Peter Singer placed Bangladesh in the “hopeless” category. “We have no obligation to assist countries whose government make our aid ineffective,” Singer wrote. Paul Ehrlich wrote in The Population Bomb that, “India couldn’t possibly feed two hundred million more people by 1980.” He endorsed a system of “triage” that would end food aid to “hopeless” countries such as India and Egypt. (India has gone from being an economic basket case to a bread basket). Garrett Hardin used the lifeboat earth metaphor to argue against helping the world’s poorest. That help would lead to unsustainable population growth that would capsize the lifeboat, so they had to be thrown overboard.  
 
Globalization was mostly about the lifting of barriers to trade and investment and liberalizing domestic economies. The era has been called “the age of Milton Friedman” by Andrei Shleifer (2009) because it marked a stride toward a global free market. The miracle of globalization was, accidentally or on purpose, the result of the unleashing of market forces. Instead of planners, foreign aid, high tariffs and import substitution, it was greater market openness that drove this transformation.

I don’t know if this qualifies as “trickle down,” but I think we should all give thanks for what has been accomplished. Sadly, the Great Recession and the populist revolt have put the brakes on the process. 

7

John Quiggin 09.02.17 at 3:53 am

@6 I’ve responded to this point before, as follows:

In the wake of the GFC, some advocates of economic liberalism have sought to shift the ground of debate, arguing that, whatever the impact of financial globalisation on developed countries, it has been hugely beneficial for India and China which, between them, account for a third of the world’s population.
There are all sorts of problems with this argument.
The relatively disappointing economic performance of China and India in the postwar decades certainly provides strong grounds for criticising the economic policies of Mao Zedong and Nehru. But even in the days when some observers saw these policies as providing an appropriate development path for the countries that adopted them, no one seriously proposed their adoption by developed countries. And as more attention has been focused on the irrational aspects of these policies (such as the Great Leap Forward, in which people were made to melt down their cooking pots to provide scrap for backyard smelters, which presumably produced new cooking pots, or the dozens of licenses required to undertake the simplest economic activity in India) it has become easier to understand why their removal or relaxation
At the same time, neither of these rapidly-growing economies come anywhere near meeting the standard description of a free-market economy. China still has a huge state-owned enterprise sector, a tightly restricted financial system and a closely managed exchange rate. India began its growth spurt before the main period of market liberalisation and also retains a large state sector. In both countries, as earlier in Japan and South-East Asia, the state has played a major role in promoting particular directions of development.

In summary, while the development success stories of China and India, and, before them of Japan and the East Asian tigers, may have some useful lessons for countries struggling to escape the poverty trap, they can tell us nothing about the relative merits of economic liberalism and social democracy.

8

Alex SL 09.02.17 at 4:43 am

I am not an economist (is IANAE a thing?), but it always seemed to me that the two main problems with trickle-down are the second to last paragraph – empirical disproof – and the idea that, say, lowering taxes from 35% to 25% is some kind of huge incentive that will make people who are affected by that change work harder. I do not find it a priori plausible that somebody would ever say:

“Hey, if I work harder to earn another $10,000 I will only actually get to take $6,500 home. If that is the case, then I will not work harder and rather lose out on the $6,500, even if I could really do with another $6,500. So there. But if you lower the tax rate so that I get to keep $7,500, now we are talking! Those 10% are so much more relevant than the other 65%.” (Add zeroes at the end of those numbers as required.)

This is just not a reasoning that will ever make sense or occur to anybody in real life, i.e. outside of a libertarian think tank, unless we are indeed talking a tax rate of 95%.

9

Matt 09.02.17 at 5:56 am

I do not find it a priori plausible that somebody would ever say:

“Hey, if I work harder to earn another $10,000 I will only actually get to take $6,500 home. If that is the case, then I will not work harder and rather lose out on the $6,500, even if I could really do with another $6,500. So there. But if you lower the tax rate so that I get to keep $7,500, now we are talking! Those 10% are so much more relevant than the other 65%.”

for what it’s worth, I have thought things at least very similar to that several times, and even acted on them, when, for example, I was already teaching several classes, and I was asked if I’d like to teach one more. At that point, teaching one more would start to have significant impact on my quality of life and ability to do writing. I’d be unhappy. But, I could use the extra money. But each dollar cut off made a bit difference, considering that it would actually be a pretty significant impact on my happiness at that point to teach another class. Even if I could use the money, it had to be a fair amount of money before I’d take the class on. Now, I don’t mean to draw any sort of general conclusion from this, or to suggest that it’s a problem with the post, or to suggest that my situation suggests anything important about tax policy or whatnot. But, that things like this happens seems pretty clear to me, because they have happened to me.

10

Bill 09.02.17 at 9:47 am

The two propositions seem at odds. If people earn their marginal productivity (by #1), there should not be the externalities (in #2). The presence of the externalities suggests that incomes are not set according to marginal contributions to the economy. In turn, that calls into question the general equilibrium model.

11

ccc 09.02.17 at 9:54 am

“So, reducing taxes on high income groups will make everyone better off.”

Even if 1 and 2 hold that “better off” conclusion still does not follow. Or at minimum “better off” must be defined and qualified. How well off social animals like us are arguably depend on both absolute and relative factors. Even if 1 and 2 raise the economic floor for literally everyone they may also increase economic inequality, which can cause health worseing (spirit level type argument) and worse equality of opportunity for the children of those not earning most. Seeing one’s child strive but not succeed because of a system of economic inequality is arguably a “being worse off” factor.

12

nastywoman 09.02.17 at 10:08 am

”Trickle down” never works if you don’t have Rich dudes who don’t trickle down enough.
But it kind of works if you have a German Mittelstands-dude who has such a high social conscious with an empathetic responsibility for his workers and his community that he pays his workers excellent – insists on NOT firing -(or outsourcing) them and is in economical crisis even willing to sacrifice his own well being for the well being of his community and workers.

And this simple Kindergarten-wisdom (philosophy?) just doesn’t… apply (anymore?) in THE homeland – even supposedly – and to a certain extend applied when a dude called Ford made sure that his workers could afford the cars they build.

13

Collin Street 09.02.17 at 11:21 am

”Trickle down” never works if you don’t have Rich dudes who don’t trickle down enough.

It’s better than that: even if trickle-down actually works the way it’s supposed to… the way it’s supposed to work it’ll make problems of equality worse, not better, long-term.

See, you’re giving the money to people with the expectation that they will use it to make “profitable investments”. But a profitable investment — definitionally — returns more money to its maker than they spend: the result of “trickle down” is profitable investments made by the currently-rich that make them even richer.

14

Tim Worstall 09.02.17 at 11:23 am

“Claim 2 is generally assumed to be true, although it’s not usually spelt out. It is true either if there are information externalities (the most productive provide a model for others to copy) or complementarity in production (working with highly productive colleagues and managers makes people in general more productive).

If Claim 2 doesn’t hold then all the benefits of increased effort from highly productive workers and investors is captured by the workers and investors themselves. This means that the there is no ‘trickle down’ except through the tax system. The policy implication is that tax rates for high income earners should be set at or near the top of the ‘Laffer curve’ where revenue is maximized, estimated by Piketty, Saez and Stantcheva at around 80 per cent.”

Well, no, not really. Imagine, just imagine for a moment, that the harder work and greater investment in pursuit of those higher incomes leads to something like that new leukemia drug just approved. $500k a treatment today, that being cheaper than the other treatment, bone marrow transplant. And in 10 or so years time the patent expires and it drops in price again. No, this is not an argument that drug patents are super, rather, do we think that people are incentivised to create new things by the prospects of gaining gazillions?

Are those 600 Americans likely to get this treatment each year made richer by its existence?

We’re made richer by being able to consume the greater production of those more highly motivated high productivity people, aren’t we?

As to the 80% peak, that suffers from the same problem that the very similar Diamond and Saez one does. It assumes that we’ve already closed off all avenues of avoidance (D&S using “allowances” to mean this). A residence based tax system, rather than a passport one, is just such an allowance. For you can avoid by leaving the country and we’ve even got a name for when this happened, the brain drain.

Further, the Staggers gets the NI situation wrong. D&S, certainly, talk about “taxes on income”, not “income taxes”. They specifically include employer paid taxes on employment income. Meaning adding employers’ NI for the UK, not just the residual 2% employees’. At which point, with allowances like residence based, D&S give us something like 54% as the Peak. Or, given NI, somewhere around where we are with income tax alone right now, 45% or so.

15

bob mcmanus 09.02.17 at 12:03 pm

IANAE, and no longer reading as much economics as I used to, and this may belong to JQ’s last paragraph about trivial trickle-down theories, but I was inspired to visit the Marx-Kalecki three-sector model. (Investment goods, wage goods, luxury goods/capitalist consumption.) Which as usual, approaches the problem from the production side. “Trickle-down” in this case depends on how capitalist spend their increased income, whether on investment or luxury goods.

John Bellamy Foster Monthly Review, 2013. One point here is to refute the “profit-squeeze” theory, which still endures in some Marxian economics. This may be a “what next after refuting trickle-down.”

Only for those interested, I am not capable or enthused to defend the whole thing.

“For Kalecki, the power of labor to increase money wages—although present to a minor extent in the normal business upswing—was not a significant economic threat to capital even at full employment due primarily to the pricing power of firms. Hence, if the system neglected consistently to promote full-employment through the stimulation of government spending this was not to be attributed to economic reasons per se, but rather to the political threat that permanent full employment would represent to the capitalist class.”

I buy this completely, and the “pricing power of firms” is the main reason I oppose any UBI…job guarantee/ELR is much better. But state infrastructure is best. The taxes on capital and capitalists must go to government spending (socialized worker consumption) and investment (workers capital?) or it is counterproductive.

16

bob mcmanus 09.02.17 at 12:22 pm

Sorry. Two more things

1) The Meidner Plan is back in the news, see Jacobin.

2) Increased taxes on capitalists for redistribution will upset capitalists. You want to drive almost every economist nuts, start talking about state control of pricing. That can done indirectly in ways like gov’t housing or Medicare-for-all. The problems with redistribution without socialized pricing are evident in the PPACA.

17

Alex SL 09.02.17 at 1:11 pm

Matt @9,

I may misunderstand, but the way you describe it it seems as if the concern to become overworked would have been the main factor. I must say that if the question is whether we want to lower top tax rates by 10% so that more people work themselves to death and get a heart attack in their 40s I’d say thanks but no thanks.

Maybe even phrasing it as “working harder”, as I did in my first comment, is the wrong way of looking at trickle-down economics; the main argument seems to be that an investor or company owner would rather let their money sit around useless and earn a mere 1% in interest than invest in some ‘job creating’ activity that earns a return of 20% if they only get to keep 13%. Phrased like that I think it would be hard to argue that any even half-rational investor would ever reject the 13% ROI.

The problem might be that there just is no additional, unused opportunity for productive activity that earns a return of 20% on investment if the masses have seen stagnant wages for the last few decades. How would they afford to buy the new product that the investment would be in, except in the sense of a zero sum game where another investment elsewhere becomes less attractive to make up the difference? So if the investor’s tax rate is lowered their choices are still money sitting around uselessly or inflating a bubble.

18

steven t johnson 09.02.17 at 1:38 pm

A man digging a ditch with a shovel is working much harder than the dude with a backhoe. It is not clear the guy working harder gets paid more. It’s not clear the guy on the backhoe is getting more than minimum wage. The amount of profit expected from the ditch seems to me to depend on a lot more than how hard or productive either worker is. And the last I looked, economics doesn’t have an agreed upon theory on the dynamics of the general rate of profit.

All that stuff about marginal revenue productivity etc. seems to me to be unlikely to be much more than ideology.

19

bob mcmanus 09.02.17 at 2:40 pm

Last one, because I would like this to be clearer. I am inverting is a little bit from “decreased taxes with increase growth” to “will increased taxes inhibit growth” using a 3-department model because:

Krugman on Taxing Rents yesterday

Krugzilla: “much corporate taxation probably doesn’t fall on returns to physical capital, but rather on monopoly rents.”

So question for Quiggin, leaving aside finance and rents

Are increased taxes on physical/fixed capital a good thing, growth and welfare enhancing?
Are increased taxes on corporate returns, profits, good?
Should we end all depreciation allowances?
De we want to tax productive investment?

It is about the framing. Too often this is argued as about capitalist income and capitalist consumption, as in Obama taxing private jets.

20

nastywoman 09.02.17 at 5:35 pm

@13
”See, you’re giving the money to people with the expectation that they will use it to make “profitable investments”.

Or to spend it for a really great… watch? – as I happen to know -(and love) these great Swiss Watchmakers who love to have the dough of Rich US-dudes redistributed towards some real cool Craftsmen. -(wherever they are) – as I’m right now spending some time with some really cool US carpenter -(in Iceland) – who loves it too – when he get’s flown to Iceland to do some ”real cool” work here too.

And isn’t that really… ”fascinating” that so many ”Rich Dudes” -(of all nations) seem to have this ”thing” about (only) making “profitable investments” in order to return more money to themselves – than they spend – in order to make them even richer BUT when it comes to pay for a ”Craftsman” who manufactures a nice well done cabinet -(or a well working golden watch) a ”Real Rich Dude” is even willing to throw in a first class airline ticket to Geneve?

Whassup?

21

John Quiggin 09.02.17 at 11:17 pm

Bill @10 This is a good point. I think (1) needs to be modified to say that incomes are proportional to marginal product. Then point (2) requires generalized external economies of scale, which is the central idea in endogenous growth theory. I’ll work on this.

Tim @14 The example you give is precisely covered by point 2.

22

Ebenezer Scrooge 09.03.17 at 12:27 am

Trickle-down is popular because many people are happy to tug their forelock if they can look down on somebody else. This is more an American disease than a European one.

23

Collin Street 09.03.17 at 1:07 am

Phrased like that I think it would be hard to argue that any even half-rational investor would ever reject the 13% ROI.

You think other people are like you. Other people think other other people are like them. What this says about advocates of trickle-down economics is left as an exercise.

24

Gareth Wilson 09.03.17 at 7:00 am

There is a problem which is referred to in New Zealand as the three B’s. Once people own a boat, a BMW, and a bach (holiday home), there’s a tendancy to work less hard, maybe even retire early and sit around doing nothing. Margaret Thatcher herself harshly criticised the British equivalent of this. I share your skepticism that tax rates will help with this, but it is a problem.

25

nastywoman 09.03.17 at 7:45 am

– or let’s blame it all on the ”fashionable American-Anglo culture of ”Disruption”?
While in sane and reasonable economical environments the words ”trickle down” just don’t exist BUT a culture of ”Cooperation and Compromises or how do the Germans call it ”Mitbestimmung” – and there is no need for ”trickle down” in Mitbestimmung as everybody agrees that everybody should get her or his faire share of the ”winnings”.

26

bob mcmanus 09.03.17 at 10:19 am

Okay fine

“Capitalist income when directed by policy into productive actually job-creating investment is of general benefit and should be taxed at a lower marginal rate.”

…is the big trickle-down, the primal, universal trickle-down that enables all the others.

Not capitalist income vs labour income, not capital income share vs labour share, the problem is capital vs labour, ” good to increase capital cause jobs ” is an assumption so basic I don’t even know how to quantify its adversary or opposition. Raw Number of workers? Capital’s opposition is made invisible by mainstream economics. And looking at capitalist income or capitalist share of income or marginal productivity etc I think are means to ensure that capital quantity keeps increasing (“cause we can tax the profits or outflow”) and capitalist political power (cause we don’t want to lose the factory or sports stadium cause jobs) keeps increasing.

No, Marx didn’t go here, but then Marx believed that increasing capital quantity would inevitably lead to proletarian revolution. We no longer have that excuse.

Tax not consumption, tax not income, tax capital directly so that we have less of it. The govt can use the income to create socialized investment and production.

27

CarlD 09.03.17 at 11:10 am

“In the absence of taxes and other government interventions,”

This is always the weasel out. There are always at least some taxes and government interventions on which to blame the failure of markets to work their magic.

28

bob mcmanus 09.03.17 at 12:25 pm

Last one again. I may not respond if anyone bothers, because this is at least orthogonal to the OP.

How to tax capital? Simple, an example. Declare face value of equities at closing bell on April 15 and tax it. 50%, 10%, 0.1%. Forget realized capital gains or transaction taxes, tax face values. Yes indeed I understand what will happen to face values the day before and the day after. I want to drive NASDAQ to zero, how about Krugman? Why not? (Also bonds and bank assets, of course)

Yes, I know we do tax property at a local level and I spent some time looking for the tax incidence between business wealth and housing values but I suspect it varies wildly along with a maze of capital-protecting laws. I did notice that non-profits are taxed differently if at all, in other words, still looking at property under the lens of income. So the Clinton Foundation provides Chelsea economic security and political power in perpetuity.

Capital is a power relation that shows up in de-facto segregated communities and unequal education spending and outcomes and I would possibly tax houses as I would equities.

And of course all this can be incremental and marginal, we don’t need to go fullbore expropriation from the start.

But private property is a socialized power relation, and we want to discourage private investment as much as possible. Otherwise, its still a trickle down economy.

29

faustusnotes 09.03.17 at 12:27 pm

I think it’s important to take issue with comment 6, by Ian Maitland, which is a collection of despicable lies. I know it makes no difference to Ian Maitland, who is a lying shill, but it is important for people reading.

First Maitland says (contradictorily) that the proportion of the world population in poverty has fallen to 5%, and that only 152 million people live in poverty. This is untrue. The World Bank estimates that 10.7% of the world’s population, or about 790 million people, live in poverty, and that the majority of poverty reduction has only occurred due to China and India (i.e. no change in Africa). Maitland is using dubious numbers from a single shonky 2009 analysis published in that dumpster for shit papers, the NBER.

Second, Peter Singer never wrote the phrase Maitland accuses him of, with respect to the Bangladesh famine. Singer’s paper on the famine can be found here and is a discussion of the urgent need to increase aid to “East Bengal”, as well as whether people in developed countries are justified in impoverishing themselves in support of starving people in East Bengal (he concludes that they should not impoverish themselves so much that their utility is lower than that of the Bangladeshis they want to help). He discusses and dismisses the idea that people in rich countries should not give aid to East Bengal because the real cause of its famine is population control, and aid without population control won’t work: He recommends aid now, and then further aid for population control. He says people should be “working full time” to push both issues with their government, and sneers at the UK government for valuing concorde more than starving Bangladeshis.

The nearest quote to that which Maitland attributes to Singer comes from a later book, Practical Ethics, and is part of a discussion about whether rich people should give money to aid poor countries, and how to judge the best way to do this. Practical Ethics was written in 1979, about the time that now-independent Bangladesh was becoming a success story in health, population control and nutrition despite being much poorer than India. In the sentence before the sentence closest to that which Maitland cites, Singer states that we have an obligation to assist poor countries, but not to waste our money on ways that don’t help. This sentence has nothing to do with Bangladesh, and nothing to do with abandoning poor countries to starve – in fact it concerns the best way to do precisely the opposite.

In short, what Maitland wrote here is entirely false, deliberately misleading, and malicious. I know most people on here are aware that Maitland is a lying liar, but just in case anyone is new here and thinks that the failure to challenge his lies is a sign that they’re accepted by others as fact, here is the rebuttal: everything at comment 6 is a vicious lie, and people like Maitland should be deeply ashamed of themselves for the deliberate and mendacious lies they tell.

30

Layman 09.03.17 at 12:50 pm

Garett Wilson: “There is a problem which is referred to in New Zealand as the three B’s. Once people own a boat, a BMW, and a bach (holiday home), there’s a tendancy to work less hard, maybe even retire early and sit around doing nothing. Margaret Thatcher herself harshly criticised the British equivalent of this. I share your skepticism that tax rates will help with this, but it is a problem.”

Why is this a problem? Sure, it’s an affront to Puritanism, but besides that?

31

Cranky Observer 09.03.17 at 1:03 pm

= = = Once people own a boat, a BMW, and a bach (holiday home), there’s a tendancy to work less hard, maybe even retire early and sit around doing nothing. […] I share your skepticism that tax rates will help with this, but it is a problem. = = =

Why? Why is it a problem, that is?

I realize that many global cultures based on English, Scots, and closely-related Northern European cultures have adopted the neo-Puritan attitude that mankind deserves to be punished and that 60-100 hours/week of grinding labor from age 16 to 80 is a necessary part of that punishment. I’m less sure why the rest of us should accept that, particularly given the trend toward automation of production of the necessities of life.

32

some lurker 09.03.17 at 2:55 pm

The devil is, as always, in the details. These arguments always ignore the inconvenient facts of tax brackets (you mean the 90% tax rate for high earners doesn’t apply to the first dollar earned?) or deductions/exemptions. My rule of thumb is that top earners pay an effective tax rate of around a third of the actual rate. George Romney was assessed a 70-90% rate in the 60s and paid something in the 30s: his son Willard would have been assessed a 39.6% rate and paid something in the teens, probably not too far off what most of the CT commentariat pay.

Economics is theoretical politics just as politics is applied economics: it all made more sense when it was called “political economy.” Then you knew that economists were trying to write policy and that politicians were trying to hide their schemes behind some academic fig leaf.

And +1 to the “tinkle-down” variant…I’ll be sure to use that.

33

Tim Worstall 09.03.17 at 5:11 pm

“Tim @14 The example you give is precisely covered by point 2.”

Umm, how? If there’s a consumer surplus then the workers and inventors and capitalists etc simply aren’t gaining all of he value. I don’t we generally think that there is usually a consumer surplus?

34

RD 09.03.17 at 5:18 pm

GW @ 24
A rich guy on holiday at the beach notices a local fisherman sitting on the beach strumming a guitar and sipping a beer at 1400 hours.
He inquires as to why he is not still at work.
Local; “I’ve caught enough fish for today!”
Rich Guy; “But if you work harder and longer, 6 0r 7 days a week, 12 hours a day,you will be able to buy another fishing boat, employ more fisherman, buy 2 more boats, then 4 boats.”
Local:” What for?”
Rich Guy: ” So you can retire and sit on the beach strumming your guitar an drinking beer!”

35

bruce wilder 09.03.17 at 6:07 pm

. . . the marginal productivity theory . . . is at the heart of neoclassical economics. In a general equilibrium model of a perfectly competitive economy with full employment, it can be deduced as a theorem. . . . The neoclassical model . . . has never been a fully accurate representation of the economy.

Way to go out on a limb with classic understatement. Never a “fully accurate representation”!

It seems to me we are back in Lesson 1 / Lesson 2 economics, wondering whether Lesson 2 is going to be an explanation of how Lesson 1 is wrong and wrong in every conceivable respect and implication, . . . or an explanation of how Lesson 1 is right, but not quite right.

In some respects, you seem to want to turn the claims for trickle-down economics topsy-turvy and show how pretty much the opposite of what the advocates of trickle-down predicted and recommended has turned out to be true and ought to be recommended.

But, in other respects, you seem to want to defend neoclassical economics, as a merely imperfect representation, which has, perhaps become less accurate as the further development of the economic system has unfolded.

The rhetorical turn, “it is even less accurate now than in the past” leads to a narrative in which epiphenomena are transformed into their own causal forces, perhaps to avoid the contradiction in your analysis. Wage stagnation is an outcome that disproves the neoclassical economics that recommended the policies that created wage stagnation, but some instinct holds you back from saying that, so now wage stagnation is itself a reason to believe that neoclassical economics is “less accurate” a representation. Did wage stagnation cause itself? Did the recommendations or expectations of orthodox neoclassical economics have anything to do with it?

I guess we do not need to answer and we should not wonder if the recommendations themselves were innocent misunderstandings of the economy or a fraudulent apology for policy that in fact targeted the consequent upward redistribution of income and wealth.

Is neoclassical economics simply a rhetoric engine for generating these frauds or did neoclassical economists know what the powers-that-be were doing as well as how to sell what the powers-that-be were doing? It is a classic conundrum in economics. The doctrines of economics provide the styling for the outward apology and (importantly false) rationale (see the discussion of the allegedly Machiavellian roles of James M Buchanan and Milton Friedman in the other thread) for policy, but also the operating manual for policy. Somewhere, someone has to have some idea of what they are doing, in pulling the levers and operating the machinery of the economic system. Even granted that there might be important limits — the serious people have been known to run the economy off the edge of a cliff. It is just hard to know even then — when we are enveloped in a crisis of crisis capitalism — if the powers-that-be are doing it by mistake (1930) or on purpose (2008).

I cannot tell from the OP whether you think economic theory and the intuitions it cultivates, for better and worse, should matter or not. Is neoclassical economics wrong? Or misused?

36

Howard Frant 09.03.17 at 7:55 pm

I sort of question whether it’s even worth engaging with trickle-down at this level, as opposed to just saying “Well, it doesn’t work.” Are there still serious ecenomists who are saying it does?

JQ@7

The dramatic increase in income and reduction in poverty in the Third World go far beyond China and India. China is the most extreme, but it’s pretty much everywhere, except Africa.

Alex SL@8

People are always tempted to respond to economists’ assertions by saying,”Well, *I* wouldn’t do that!” Unfortunately, introspection generally doesn’t work, because the assertions usually are not about what a typical person would do, but about what people on the margin would do, i.e., people who are close to indifferent beween doing it and not doing it.

steven t johnson@18

Two things you can be sure of (both in line with neoclassical theory): 1) The guy operating the backhoe will be making more than the guy wielding the shovel 2) The guy operating the backhoe will be making (a lot) more than the minimum wage.

37

J-D 09.03.17 at 8:48 pm

Gareth Wilson
How is it a problem? a problem for whom?

38

F 09.03.17 at 9:30 pm

14 is also addressed quite well and in detail by Michael Pettis’ latest.

39

hix 09.03.17 at 9:43 pm

” but it is a problem.”

No.

40

Peter T 09.04.17 at 12:05 am

1) The guy operating the backhoe will be making more than the guy wielding the shovel 2) The guy operating the backhoe will be making (a lot) more than the minimum wage.

At the level of: a lot of guys wielding shovels will move less dirt than a lot of guys driving back-hoes, and so be less productive and have less to share, this is true.

At the level of the work-crew digging ditches it’s not. Three guys dig a ditch – one marks the line, one drives the back-hoe, one shovels the odd bits that the back-hoe can’t do. Every so often they change places, because they all know all the jobs, and shovelling is hard work. Or old Joe drives the back-how while young Dave does the shovel, because that’s fairer given Joe’s got a bad back. Joe gets paid a bit more because he’s senior. And Ramjit gets paid most because he’s in charge and is responsible for seeing that the ditch goes where it’s supposed to.

You can’t devolve cooperative production down to individual productivity.

41

Tabasco 09.04.17 at 12:20 am

“The dramatic increase in income and reduction in poverty in the Third World go far beyond China and India.”

No one talks much about South Korea, but a generation ago they were very poor. Now they are as rich as Japan, with income distribution like the Scandinavians. Of course this all happened with a great deal of heavy handed government intervention, to the disapproval of free market fundamentalists in the West, but it was still capitalism.

42

Gareth Wilson 09.04.17 at 12:24 am

It’s a problem because the man with the three B’s could be producing more wealth and improving everyone’s standard of living, but he isn’t.

43

J-D 09.04.17 at 5:49 am

Gareth Wilson
Well, hypothetically he could be; but then again, hypothetically he could be hard at work grinding the faces of the poor, and it’s a good thing, and not a problem, that he isn’t. What he is actually doing is indulging himself with leisure, which at least contributes to his own standard of living. If everybody works less, everybody has more leisure, which is a contribution to everybody’s standard of living.

44

Scott V 09.04.17 at 1:46 pm

“If Claim 2 doesn’t hold then all the benefits of increased effort from highly productive workers and investors is captured by the workers and investors themselves. “

This statement does not seem accurate.

My restatement would be:
If Claim 2 doesn’t hold then all the benefits of increased effort from highly productive workers and investors is captured by the workers, investors and their customers.

Encouraging a popular actor to take on another role, replacing someone less skilled, will not in and of itself increase anyone’s productivity. It will however benefit those that consume the actors output.

Equally encouraging a highly paid person working to abandon their secure position and take the risk of starting a firm or joining a risky start-up, may in the short run only benefit those that consume the new product.

SMV

45

Jake Gibson 09.04.17 at 2:34 pm

If, I repeat, If capital is invested, it is much more likely to be in automation. Which maintains or increases productivity while lowering labor costs.
Demand is the only thing that can increase employment. But, that employment could be anywhere in the world.

46

otpup 09.04.17 at 6:01 pm

The old myth that acquisitiveness always and everywhere falls into the neat little channels that happen to make it socially productive rather than the opposite.

47

bruce wilder 09.04.17 at 9:47 pm

Howard Frant @ 69 (re: backhoe)
Peter T @ 40 (re: workcrew)

Yes to both of you.

Like Howard, I do not see what is gained here by linking the intuitions of “trickle-down” to marginal product theory of allocative efficiency. I have even used the “big shovel” theory myself to explain the concept of marginal product and its application to wages.

But, marginal product theory is an analysis arrested at a very early stage, with no uncertainty or strategic behavior, let alone such pre-requisites of practical production organization as science, engineering, energy and management — all of them touched on in Peter T’s sketch.

It seems particularly remarkable that JQ makes no mention of what I would take to be the biggest betrayal of “trickle-down”: that lowering the marginal rates of income tax on super-high wage earners “incentivizes” (horrible word used here ironically) CEOs to direct the affairs of large enterprises in ways that transfer income upward, including but not limited to, control frauds.

If the economic system is organized primarily in hierarchical organization, then allowing those in charge to do well by predation and looting is probably a formula for increasing inequality. A wild and crazy idea I know, but there it is.

48

John Quiggin 09.05.17 at 12:30 am

BW @47 “It seems particularly remarkable that JQ makes no mention of what I would take to be the biggest betrayal of “trickle-down”: that lowering the marginal rates of income tax on super-high wage earners “incentivizes” (horrible word used here ironically) CEOs to direct the affairs of large enterprises in ways that transfer income upward, including but not limited to, control frauds. “

That was the central point of the post (incentives reward unproductive rent-seeking), so either I’ve been very unclear or BW is reading uncharitably/with poor comprehension. If anyone is still reading the thread, could they help me work out which it is.

49

J-D 09.05.17 at 2:44 am

John Quiggin

That was the central point of the post (incentives reward unproductive rent-seeking), so either I’ve been very unclear or BW is reading uncharitably/with poor comprehension. If anyone is still reading the thread, could they help me work out which it is.

‘I/you/they could have written that more clearly’ is like a fortune-teller’s cold reading, the kind of thing that is always or nearly always true, but in this case it seems to me you were clear enough (and as a cold reading obviously it applies to bruce wilder as much as it does to you; and to me as well, of course). It seems as if there was some reason (although I can’t think of one) that it was important to bruce wilder to signal disagreement with you instead of, as could so easily have been done, signalling agreement, making the same point not as a correction of an omission on your part but as an amplification: ‘One particularly important/striking example of what you’re discussing is the behaviour of CEOs of large corporations transferring income upwards including, but not limited to, control frauds’ (or something like that).

50

RD 09.05.17 at 2:44 am

No one ever said on their death bed,
“I wish I had spent more time at the office.”

51

bob mcmanus 09.05.17 at 11:46 am

(incentives reward unproductive rent-seeking)

Kodak vs Apple Janitors

“The smaller reminders can be just as telling. One former Apple contractor recalled spending months testing a new version of Apple’s operating system. To celebrate the release, the Apple employees they’d worked closely with on the project were invited to a splashy party in San Francisco, while the contractors had beers among themselves in a neighborhood pub.”

A large part of the Stormfront and Breitbart funding comes from Silicon Valley.

To tell the truth, I am not that interested in Tim Cook. I am not even interested in the Apple janitors.

I am interested in those employees that benefit from ultimate rent-seeking company Apple who went to the San Francisco party, and support either the libertarian right or the neoliberal center (and probably TPP). Whatever economic theory we come up with has to reach those folk and not threaten their livelihoods or it is politically as useless as Georgism.

52

CaptFamous 09.05.17 at 4:18 pm

Has anyone done a critique of trickle-down from the perspective of supply chain optimization? I’m a bit rusty on it, but a lot of the work that’s been done on creating incentives for supply chain partners shows why just giving people money in the hopes that they spend it never pays back as well as just keeping the money (they reoptimize at a level that involves them just pocketing a higher percentage of the money than they otherwise would have), and that effective incentives demand the desired behavior before they pay out.

53

RD 09.05.17 at 4:41 pm

The air in Shanghai was breathable when everyone rode a bicycle.
Plus exercise.

54

Procopius 09.06.17 at 9:21 am

@nastywoman — I just had to inform you that Ford DID NOT make sure his workers could afford to buy the product they made. That was one of the most successful public relations frauds ever propagated. What Ford did was to announce a “plan.” Like Trump he was a little short on the details. There were strings on the proposal. If the worker was thought to not bathe often enough, he didn’t get the $5. If a worker’s hair was considered too long, he did not get the $5. If the spies from the Service Department decided his lawn needed mowing, he didn’t get the $5. If his neighbors said he didn’t go to church on Sunday, he didn’t get the $5. If the worker’s English was thought to be deficient, he didn’t get the $5. There were many, many more strings. Ford, in fact, paid his workers rather poorly, and his Service Department was very skilled at “talking with” anyone who was dissatisfied. Henry Ford (Old Henry) was a nasty, priggish, anti-Semitic, racist [bannable], and the world is a better place with him dead.

55

anon/portly 09.06.17 at 6:06 pm

That was the central point of the post (incentives reward unproductive rent-seeking)

Presumably that is here:

These developments [presumably points (i) to (iv) listed just above] mean that cuts in the top rate of income tax will primarily reward ownership of capital, unproductive activity, or luck in choosing ones parents, rather than increasing productivity. They also undermine the second proposition underlying trickle down theory. The pursuit of monopoly profits (‘rent-seeking’ in the jargon of free-market economics) reduces rather than increases the productivity of the economy as a whole.

If I was trying to convince someone of the desirability of higher marginal tax rates on high earners, I would certainly bring up some version of JQ’s point (ii):

(ii) the increasing proportion of profits derived from monopoly power and financial sector speculation

But, even though in most ways I couldn’t be farther from Bruce Wilder in terms of appreciation for the insights of neoclassical economic theory, alongside point (ii) I would have made a point that is more like what I think BW is suggesting: the remuneration of high(er) earners (seemingly increasingly, but perhaps this is really an old story) seems to be far more subject to manipulation and less the result of pure market forces than the remuneration of low(er) earners.

(Maybe BW would actually say that no one’s remuneration has anything to do with any sort of market, but that the remuneration of higher earners especially has nothing to do with any sort of market).

(Also maybe this point is being made explicitly in the OP, and I just can’t see it – as JQ didn’t include an explicit version of this point alongside points (i) to (iv), it makes me wonder if he doesn’t think there’s been a significant change in this tendency).

Alongside these two points I would add the (in econ-blogospheric terms, Sumnerian)point that Central Banks switched from targeting unemployment to targeting inflation; the result has been much longer periods of unemployment and underemployment, (arguably) artificially depressing wages, especially at the low end. (Hence wage stagnation).

56

anon/portly 09.06.17 at 6:16 pm

As an addendum to my previous comment, is it obvious that lower marginal tax rates actually encourages unproductive rent-seeking among corporate executives? At first glance I would think it would just alter the form; labor income vs. stock options vs. perks and so on. At second glance I wonder if it couldn’t go the other way, maybe the income effect would out-weigh the substitution effect. (I might not be thinking very clearly about this).

Anyway, after reading the following, I have never underestimated the intensity (insanity?) of people, no matter how well off they are, about maintaining their income at what they feel is the “necessary” level:

https://www.wsj.com/articles/SB866579346786280500

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