'Trickle down' again

One or two bloggers have erupted in consternation over Idiot/Savant's discussion of co-called 'trickle-down' economics, but none that I've seen has gone to the heart of his characterisation of 'trickle-down economics,' in my view between them succeeding only in throwing more heat than light on the subject -- and I suspect I/S is a man who responds better to the latter than the former. Let me see if I can succeed in throwing some light, with perhaps a little appropriate heat to follow swiftly on its heels.

I/S began his discussion in this way:

"Remember “trickle-down economics”? That was the lie the Revolutionaries told us in the 80’s and 90’s to justify tax cuts for the rich. The idea was that they would get richer, but that some of their gains would “trickle down” to the rest of us, thus making everyone better off. It didn’t work - instead, the rich got richer, and the rest of us got poorer in real terms."

Leave aside for the moment I/S's claim that we all got poorer, but according this somewhat naive view of economics, capitalism is supposed to be characterised by the poor getting the crumbs that have trickled down from the top tables of the rich. The eminently naive John Kenneth Galbraith characterised it thus: "If you feed the horse enough oats, the sparrow will survive on the highway."

But no sane economist has ever advocated such a view. For a long time now, the eminently sane Thomas Sowell has been inviting anyone -- anyone -- to prove him wrong in that assertion:

A year ago this column defied anyone to quote any economist -- in government, academia, or anywhere else outside an insane asylum -- who had ever argued in favor of a 'trickle down theory'... a stock phrase on the left for decades and yet not one of those who denounce it can find anybody who advocated it. The tenacity with which they cling to these catchwords shows how desperately they need them, if only to safeguard their vision of the world and of themselves.

Frankly, if you want to see "trickle-down" in action -- that's the literal trickle-down as described by I/S and the naive but quotable John Kenneth -- the only place you're going to see it is in Government. In fact, that's precisely where the phrase came from: it was being used to describe the New Deal's quasi-fascist Reconstruction Finance Corporation. It can be seen today in all its Clark Government glory in Labour's Welfare for Working Families programme -- a very model of "trickle down": they take your money, pour a very large portion of it down various departmental drains (boosting 'consumption,' property prices and bar bills around central Wellington), and then dole out a small proportion of it back to some voters (for which these voters are expected to be pathetically grateful).

And you are, aren't you? You're happy to get anything back.

That's trickle-down for you, as administered by the residents of the country's pre-eminent insane asylum, the Beehive.

Now, I suspect that I/S won't agree with me on that point. His loss. (And there are others who won't agree either, some of whom claim the late Wolfgang Rosenberg as a mentor.) But he did make the point, if you recall, that "in the 80's and 90's ... that not everyone shared in the country's growth." This point of his, which is probably the one on which he would wish to stand, I haven't seen anyone address (please let me know if I've overlooked someone -- I make no claim to omniscience on that score), and it is a point on which he assembles a fine array of statistics in support of the claim.

I'll only comment in passing of the unsuitability of undue reliance on changes in the number of people in 'poverty,' since the official poverty figure changes with the seasons. But let's allow him his point. Let's agree that inequality increased after the New Zealand economy, described by David Lange as being like "a Polish shipyard" -- and that in the days when Polish shipyards were less likely to make ships than revolutions -- was freed up, at least to some extent. (We've talked before about how the Douglas years were far from the revolution they were claimed to be -- scroll down to the rocketing tax graph for the chat.) Let's agree that there are many more rich people now than there were when Muldoon had laws that specifically prohibited rich people, excepting those who donated to the Muldoon campaign for subsidies and re-election.

But to concede I/S's point is not to concede the problem. More rich people means more inequality. It's obvious. If Bill Gates, Warren Buffett and Ted Turner were to move themselves and their disposable income here, the country would at once be wealthier, and so too would the 'income gap' have increased. It would only be very few who would call this is a problem, and those few are named Bradford, Kedgley and Trotter.

I doubt however that this point will be convincing enough, since it doesn't quite address the substantial point. The substance of I/S's claim is that the poor have got poorer over recent years, even as the economy has been 'freed up.' This isn't supposed to happen. As it happens, economist Paul Krugman (today's John Kenneth Galbraith) pointed out the same thing in the American context not so long ago. And as it happens, George Reisman (today's Ludwig von Mises) agreed with him. But he and and his mentor Ludwig von Mises pointed out three things that Galbraith, Krugman and I suspect I/S and his critics have overlooked:

1. Neither the American nor the New Zealand economies have been 'freed up.' Look again at that graph of NZ tax rates in the post linked to above, and contemplate too the points made in Lindsay Perigo's speech 'In the Revolution's Twilight,' delivered to an international audience, on the revolution that New Zealand didn't have in the eighties and early nineties.
2. Rich people who like to remain rich do not consume the majority of their wealth on champagne, caviar, nights out with Paris Hilton and large donations to global warming deniers -- more's the pity -- instead they invest their money, producing new capital goods. Explains Reisman:

   The truth, which real economists, from Adam Smith to Mises, have elaborated, is that in a market economy, the wealth of the rich—of the capitalists—is overwhelmingly invested in means of production, that is, in factories, machinery and equipment, farms, mines, stores, and the like. This wealth, this capital, produces the goods which the average person buys, and as more of it is accumulated and raises the productivity of labor higher and higher, brings about a progressively larger and ever more improved supply of goods for the average person to buy.

3. What make wage rates higher in richer countries is, in a word, investment. Explained Ludwig von Mises, back when Krugman was just a boy:
   

   The average standard of living is in this country higher than in any other country of the world, not because the American statesmen and politicians are superior, but because the per-head quota of capital invested is in America higher than in other countries — because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.

   This point is frequently overlooked, but it is at the heart of any mature understanding of wage rates and productivity. Explained simply, this means that if we're being paid to move a mountain of dirt and all we have is a shovel, we're going to be significantly worse off than the chap who has a steam shovel; the other chap's wages will be commensurate to the greater productivity brought about by the greater capital investment, as will ours, with the lesser investment.

There are other wrinkles with greater capital, such as greater demand and the like, but the point made here is a simple one when understood: greater capital accumulation in general means higher wages.

A simple point when understood, but let's attack that "in general" point above, since we haven't yet quite finished making our point, have we?

If greater capital accumulation in general means higher wages, then (if we concede I/S's stats) why haven't we seen that happen in recent years? Once again, Reisman has the answer, and since it goes for a few paragraphs and, since I believe it goes right to the point of answering I'S's specific objection, you might want to get a drink ready so as to savour it properly. The answer, says Reisman, is "suggested, surprisingly enough, by Krugman himself, when he referred to 'power relations' in contrast to 'market forces'.”

“Power relations”—i.e., the use of physical force by one person or group against another—are present in all forms of government intervention in the economic system. There is no law, regulation, ruling, edict, or decree whose enforcement does not rest on the threat of sending armed officers to arrest and imprison violators, and, if they resist, to kill them if necessary...

Government intervention in the economic system is the use of force not against common criminals, who have previously initiated its use, but against peaceful citizens engaged in production and voluntary exchange and whose only “crime” is that they have done something the government has decided it does not like. This force serves to prevent people from doing what they judge to be in their interest to do and to compel them to do what they judge to be against their interest to do.

In all cases of this kind, the government’s force operates to make people worse off than they could have been. And the more extensive the government’s intervention becomes, the greater becomes the gap between the life that people must live and the better life they could have lived had the government not stood in their way. At some point government intervention becomes sufficient to cause people to live not only worse than they might have lived, but worse than they actually did live in the past.

This last is what has been happening to the American people since the era of the “New Frontier” and the “Great Society.” Since that time, the weight of government intervention has become sufficient to stop or nearly stop economic progress for large numbers of Americans and to cause actual economic decline for many.

Inflation, Social Security, and Medicare [and we might add to this Working for Families] undermine the incentive to save and accumulate capital. Vast government budget deficits absorb large amounts of the savings and capital that do exist and divert them from business investment to financing the government’s consumption [as of course do equally vast government surpluses]. More recently, the government-engineered housing boom, built on the foundation of [easy credit] imposed by the Federal Reserve, has operated in a similar way and diverted further vast sums from business investment to housing purchases. And before the housing boom, the dot-com bubble, also created by the Federal Reserve, created the illusion of vast wealth and capital that served to squander substantial portions of the capital that did exist.

Inflation has also played a major role in enlarging the highest incomes in the economic system. This has been the case insofar as inflation (understood in terms of an increase in the quantity of money) entered the economic system in the form of new loans that served to drive up securities prices and thus the value of stock options. Take this away, and the rise in the highest incomes over the period that Krugman complains about would be much less, if it existed at all.

But there is more. The last forty years or so have seen the imposition of environmental legislation and consumer product safety legislation, and numerous other government programs that serve to increase the costs of production. The great majority of people assume that the higher costs simply come out of profits and need not concern them. But the fact is that the general rate of profit in the economic system remains more or less the same, with the result that increases in costs show up as increases in prices, or as decreases in other costs, notably, wages.

The real wages of the average American [and New Zealander] are stagnating in large part because the higher real wages he could have had—precisely on the foundation of the work of today’s great businessmen and capitalists—have instead been used to pay for the cost of environmental and safety regulations. Money that might have been paid as higher wages has instead been used to buy equipment, materials, and components required to be in compliance with these regulations. Larger supplies of goods that might have come into existence and driven down prices or at least prevented inflation from raising them as much as it has, have been prevented from coming into existence, especially by environment regulations.

This is the answer economic theory gives to Krugman and to the hordes of other intellectual dilettantes whose writings and lectures on the subject of economic inequality proceed in ignorance and thus end up amounting to just so much clutter—clutter irrespective of the prestige attached to the venues in which it accumulates.

Make sense? I'll leave you to savour your drink and decide for yourself, thinking it all through perhaps as the liquid in that drink trickles down your throat, and you perhaps reflect that that's the only kind of 'trickle down' that really makes complete sense.

LINKS: Answer to Krugman on economic inequality - George Reisman, George Reisman blog
Capital supply and economic prosperity - Ludwig von Mises, Mises Institute
In the 'Revolution's' twilight - Lindsay Perigo, The Free RadicalTrickle-down in action - Not PC (June, 2006)
Do the rich really make us all poorer? - Not PC (March, 2006)
The 'Trickle Down' left: Preserving a vision -Thomas Sowell
Statistics - Idiot/Savant, No Right Turn
'Trickle down' fails again - Idiot/Savant, No Right Turn
RELATED POSTS ON: Economics, Nonsense, NZ Politics, US Politics