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Sunday, 4 February 2018

Trickle Down Economics?

What is Trickle-Down Economics?

Trickle-Down Economics is a term used to describe a political philosophy based on the validity, general applicability and desirability of the trickle-down effect. It also believes the effect is a necessary feature of the financial and economic activities of the wealth classes.

What is the Trickle-Down Effect?

Since trickle down has nothing to do with economics and everything to do with politics it's pretty much what it says on the tin. Trickle Down is a metaphor. And what it tries to evoke is the idea wealth will trickle-down to the under-privileged. It's not just me saying this, here's a quote from a reading set in Economics 343 (East Asian Growth and Trade):
Concerns are arising that South Korea’s potential for economic growth is plummeting. These concerns are followed by arguments that policies that emphasised growth were, in reality, focused on the benefits of the few and the wealthy, and therefore resulted in polarisation and widened income inequality. A fundamental doubt has been cast upon the so-called trickle-down effect; no longer will the increased incomes of large corporations and high-income earners raise the incomes of small and medium enterprises (SMEs) and medium-to-low income earners and, eventually, positively influence the overall growth of the economy. [Chung, Chul, “Why Doesn’t the Trickle-Down Effect apply to Korea?” EAF Policy Debates №33, 1 September 2015]
The thing is, Chung then goes on to say that the Trick Down Effect doesn't appear to exist in general and  proposes policies designed to get it working. Is he a trickle down economist? Is he evidence that trickle down economics is a real school in economics?

On Economic "Schools"

It doesn't take much thought to describe why Chung isn't evidence that Trickle Down is a school of economics. The reason is that the schools you might hear about (e.g. Austrian. Keynesian economics) don't actually mean anything. They are all inventions convenient to armchair economics and politics (which might be described as the profession dedicated to implementing the "insights" or armchair economics).

To a certain extent, the schools so beloved of the armchair represent stages of development in economic thought. It's a bit like how we might talk about the Medieval or Elizabethan eras except no-one who describes themselves as a Medievalist advocates using only the insights of Medieval thinkers. The very idea of that probably strikes you as being absurd. And this is probably the reason why these "schools" don't come up in textbooks, in classrooms or even in lectures except as footnotes. Economics is a discipline and just as how physics has synthesised the work of Newton, Maxwell and Planck Economics as a field today is product of all the work before it.

In this sense, Trickle Down Economics is exactly like all the other schools because none of them are part of the discipline.

Assessing Trickle Down Economics

In my definition, I did two things. Firstly, I gave the political philosophy three critical parts. Secondly, I said its adherents hold that the Trickle Down Effect is a necessary feature of the activities of the wealthy. That's in there because it's what I think characterises the position. Really it's the same thing as "generally applicable" but I distinguish the two on the basis that the three parts are what I perceive to the be fundamental reasoning underlying Trickle Down policies. Yes, adherents think all activities have it anyway, but when they advance policies they're saying that policy isn't going to change that. If there's some new stuff that happens as a result of the policy, the trickle down effect will be seen there too. That kind of idea. Hence, to assess the philosophy we'll look at the three critical parts. They're the functional parts.

(Also, "generally applicable" is a lower burden so I feel if I am able to demonstrate that there's a problem with it, I am being fairer to the adherents, who are few and far between, so discredited is their ideology.)

Is the Trickle Down Effect Desirable?

Obviously, yes.

If it really was true that the financial successes of the privilege caused improvements in the material and emotional wellbeing of the under-privileged it would definitely be a good thing. It would likewise be true that I'd happily stab myself with needles nine times daily if it could be shown this would certainly benefit the downtrodden. Wait, what?

While that last statement seems ridiculous it's actually quite important. Would I kill myself if it would for sure help everyone else out? What kind of harms are sufferable in the name of achieving the benefits? I have no great fear of needles. It would not be too much hassle, I think. Eventually I'd figure out a pain minimising method. The way I wrote it, I wouldn't even need to pierce the skin actually. But I wouldn't kill myself. And nor should I be expected to. The point is, while the trickle down effect might be desirable, that fact alone doesn't help us decide what to do.

Is the Trickle Down Effect Generally Applicable? Is it Valid?

In the simple sense, general applicability asks... can we use the idea of the trickle down effect to motivate actual policy? And can we do that in general circumstances? Or does the trickle down effect apply only in specific situations?

Answering those questions, I feel, is impossible without wondering about the Effect's validity. Hence, is seeking to create the trickle down effect an appropriate idea in general? And it has to be in general, because believers in "Trickle Down Economics" (the political philosophy) apply their beliefs in general.

Obviously, Chung thinks that the trickle down effect can be generated out of policy settings. I find his language in the conclusion somewhat confusing. To me, it seems that he's talking about extracting trickle down benefits from Small and Medium Enterprises (SMEs). That's not really what trickle down economics is about because it's really just trying to solve inequality problems by making policy for the middle/comfortable classes (e.g. fees free tertiary education, extended paid parental leave). Trickle Down is all about targeting interventions for the wealth classes: the tip top.
Following the 2008 global financial crisis, countries throughout the world are placing a priority on solving the problems of job creation and income inequality. In particular, there is emphasis on the importance of SMEs, which create the majority of jobs. this type of action, however, seems to dispute the idea that the trickle-down effect is no longer valid.
When we think about applying trickle down we need to think about the causal pathways... how the process results in benefits lower down. It may, in fact, be possible to do this.

However, let's think about how the world works for a second. While it is true that long term ("tomorrow's") growth relies on investment, it is also true that investment decisions reflect actions and circumstances today. If economics tells us these two things, what it is necessarily telling us is that any interventions targeted at the underprivileged which act through the wealth classes will have a delayed impact. Investment is about growth potential and insofar as it's normally related to technology private investment will not directly involve the less educated. Due to the correspondence of education level and income this means we'll side step the people we're trying to help foremost. So, yeah, the short term impacts of private investment spending probably don't represent the trickle down effect in action.

I'm also part of the camp which argues that inequality in and of itself suppresses sustainable growth. Of course, I am also a school of thought which believes one of the motivations of post-industrial imperialism ("new imperialism") was market seeking. If we want to argue that ISDS is about creating conditions of trust in which business can operate, the Victorians had a much simpler idea: let's take over and then obviously the laws will be the ones we know we can sell under. The point is that massive expansion of what is possible (through investment) ultimately requires consumers. This is the problem with inequality in a nutshell. And today there are no more new groups of consumers to find. For investment to be worth it, there has to be a market.  In this sense, we need to be careful about the length of the delay.

(The "in concert" influences of different spending profiles (crudely, rich, poor and middle class expenditure themes) are also recognised as being important.)

Common sense suggests that aiming left when you want to throw right is a bad idea. Economic reasoning suggests that eventually the ball will end up on the right side of the court. But it also suggests we have to be careful about how long it takes to do that. In this sense, the trickle down effect is not generally applicable because it is only in specific situations where it's an appropriate solution to the problems, i.e. inequality, poverty and underprivilege. In the general case, the logic suggests that seeking the trickle down effect is self-neutralising or worse. It might pull some people up but it also pushes everyone above them further away.

Further Thoughts on the Validity Angle

This could spend a lot of time talking about how the empirical evidence says the Trickle Down effect is not generally observed. We could do that. But we won't. It's obvious and there's not much to say. It's also what we expected from the above. We're more interested in the question of whether or not it's valid to seek the trickle down effect in the specific situations where we think it can work. The way to do that is through opportunity cost. The next best opportunity foregone. Firstly, why think via opportunity cost? Secondly, what does it tell us?

To the first question, governments don't have unlimited resources. Certainly, they do have enough resources in the developed world that it's extremely pedantic to criticise discussions calling for more absolute funding of, say, the police or healthcare or education as not taking into account the tradeoffs the government has to make. Factoring every budget line into every discussion is inhibiting. And it's downright unhelpful when there is enough budget to treat discussions as being about realignments of priorities. It's not a poor man being asked to spend more money on bread when he already spends everything on, say, his weekly sack of potatoes. But the tradeoffs are there, which means we have to ask the question: what works best for the objectives of the government?

How to engage with this question is exactly why I decided to write this post. A while ago now I was talking to this dude where I happened to say something very similar to this statement I accidentally came across by someone on Reddit:
It's not subjective at all, it's generally trivial to consider if a piece of legislation is objectively good or bad as long as there is an agreed framework for objectives.
Obviously you'll notice this is a kind of subjectivity in that there are lots of different frameworks that we can choose to use, but once you're in a framework then, as our Reddit friend put it, it's often trivial. And we've already seen that from the perspective of inequality, seeking the trickle down effect generally is not a great plan. But I really have to wonder if it's even the best option in the situations where we think it might work (whatever those are).

This seems like a complicated question to answer. It's probably the sort of thing Treasury, the Reserve Bank, government ministries, local government, academics and even think tanks spend a lot of time on. But I feel like we're going to have a better potato harvest if actually sow potato seeds instead of tulip bulbs, don't you?

Conclusions? 

If you see anyone seriously advancing "Trickle Down Economics" laugh at them.

The Trickle Down Effect is hard to find, hard to reach and probably not worth the effort. Scepticism of everything is a useful maxim, but any policy which suggests the way out of inequality is through creating or stimulating the trickle down effect* deserves a particularly sceptical reception.





*Which is to be distinguished from advocating Trickle Down Economics in the sense people who believe in that believe the trickle down effect to always follow.

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