March 17, 2018 • 42 mins
The concept of trickle-down economics is tied to Ronald Reagan, but the idea's been around and in use since the 20s. It's simple: Give more money to the wealthy and they can use it to rev up an economy. But is the whole thing just a scam?
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Episode Transcript
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Speaker 1 (00:01):
Hey, everybody, it's me your old pal Josh, And for
this week's s Y s K Selects, I've chosen how
trickle down economics works. It sounds boring, but it will
actually knock your socks off. It's so interesting. And maybe
Ronald Reagan will make an appearance. Who knows. You like
to listen and find out? Enjoy. Welcome to Stuff you
(00:28):
Should Know from House Stuff Works dot com. Hey, welcome
to the podcast. I'm Josh Clark, and there's Charles W.
Chuck Bryant and Jerry and they're snickering and tittering, and
that makes this stuff you should know. Yeah, we've got
sidetracked before. We talking about things that trickle. Names, names
(00:53):
that trickle. Yes, like the famous race car driver Dick Trickle.
You say, road dude, I swear to God look him up.
I will don't image search and just look him up. Okay,
guys specify race car. Yeah, okay, that's a good idea.
You're a Google master with your Google Foo. Yes, and
(01:15):
we the three of us, are apparently all eight years
old again. Uh, speaking of trickle, Chuck, Hey, happy birthday.
That would be quiet. Jerry, you have a big mouth.
You're always talking. Well, I usually remember, but I don't
didn't today, So happy birthday. Thank you. I appreciate it.
And this will be out several weeks later, but all right,
(01:35):
I'll get to relive my birthday all over again. Thanks man.
Have you Chuckers ever seen the movie Ferris Peeler's Day Off? Yeah,
and then we'd go there at some point in this one. Yeah,
because of ben Stein. Yeah, okay, good, so you know
the answer then something the economics. Anyone who do economics? Yeah,
(02:00):
they're an ECON class. The guy who says Bueller Bueller,
that's ben Stein. Remember he had that show when ben
Stein's money which was really his money? Yeah it was,
wasn't it. I think it was like yeah, I think
maybe like they gave it to him if it wasn't
one or came out of a salary, who knows. Um.
But before that show came on, he was in Farriss
(02:22):
Bueller's Day Off as an ECON professor. And I believe
he does have a degree in economics. He's also just
a great actor and vizine pitchman. But what he was
talking about in there, he was clear eyes clear, I
thank you, clear is awesome. Yeah, that's right, that sounded
like not ben Stein. Well that was my That's as
(02:43):
steiny as I get. Anyway, he was talking about voodoo economics,
and voodoo economics was another name for trickle down economics
a k a. Reaganomics. And the person who coined the
term voodoo economics do you know John Hughes, No, Yeah,
it was George Bush Senior. H W I remember that. Yeah.
(03:03):
He he was running in the primaries against Reagan and
for the election before he came on as his vice president,
and he was deriding Reagan's economic policies, specifically his belief
and trickle down economics as voodoo economics because there's some apparently,
some sort of magic to the whole thing that makes
(03:24):
it work rather than sound economic principle. Yeah, it occurred
to me today when I was studying the stuff that
John Hughes picked this very topic to represent the most
boring thing you could talk about. I guess so. And uh,
it took me a few times to to figure it out,
because you know, I don't My brain doesn't skew towards
(03:46):
understanding economics. It's it's tough to do. But I finally did,
and I was like, you know what it's not the
most boring thing ever, It's uh, it's pretty interesting. If
I came around. That means anyone can now it's just
our um our burden to make it interesting to everybody else,
which we've already failed that spectacular. That's right. So let's
(04:10):
talk about this idea first of all, trickle down economics.
UM will explain the whole thing in detail starting in
just a moment, but we should probably say that the
disclaimer if you want to drive a fiscal conservative or
a conservative economists, or just a conservative in general crazy
mentioned trickle down economics, like call what they call supply
(04:34):
side economics trickle down economics. It drives some bonkers. There's like,
there's no such thing as trickle down economics. It's a
derisive term. It's um it doesn't capture the spirit or
the thought behind supply side economics, which is what they've
come around to call it. But back in the day
it was definitely called trickle down economics. And the whole point,
(04:54):
the reason why it was called trickle down economics is
that the idea behind it is if you place wealth
with the wealthiest people, this idea goes, they will take
that money and invested into the economy, which will get
things running again. And as a result, that economic engine
(05:16):
revving up will create more wealth at the top that
trickles down to the lower working and middle classes. Yeah,
Like who better to stimulate the economy than the super rich,
and they will like maybe open a business to put
people to work, and then those workers will benefit and uh,
directly from that investment that that person made. Right, So
(05:39):
this is the whole tree behind it. We should also
disclaim even further that economics as a field is so
far from science it's preposterous. Um. Most economic theory that
you ever will run into from John Maynard Keynes or
Adam Smith or um, John Baptiste, Um. These guys are
(06:03):
talking about pure economies the United States, and I don't
think there's any economy in the world that is a
pure economy, free market economy. The United States has things
like tariffs, and um, we have things like government intervention,
tax policy, monetary policy. There's intervention in the market. So
(06:27):
you can't ever say. We can't say, really what causes
recessions and what brings us out of them, or whether
trickle down economics is effective or if it's not, or
if it is effective. Is it effective in the long
run or the short run? And what about the opposite way,
is that effective in the long run or the short run?
We don't know. That is the thing. That's why like
(06:49):
this kind of stuff can get people's blood boiling. So
like the point of this one is to just talk
about trickle down economics and the theory behind it and
why it may or may not work, and um, on
the caveat that we don't know, and neither do economists. Yeah,
I think I left this at a little frustrated after
my research because I thought I would come away with
an answer. Um. But I mean, if you look up reagonomics,
(07:13):
which is another name for Reagan's version of the supply
side economics, you will find article, well more than that,
but hundred articles on how what a great success it was,
and then the abject failure of reagonomics, and no one
is going to agree. I looked at some of these
theories and said, well, that makes sense in an ideal world.
(07:34):
Then I look at the opposite and think, well that
makes sense in an ideal world. And I don't. I
don't know if you, like you said, I don't know
if you can I don't know if there is an answer.
Even though everyone thinks that they're right, both people can't
be right both sides. No, it's true because these are
very opposite in most cases ideas. Yeah, but what I
did find was a bunch of articles after digging further
(07:55):
that said the failures and successes of Reaganomics. And I
think to me that's probably a little more accurate because
it is in a black and white situation. Well, the
part of the problem is is if you point to
Reagan's text policies, right, and and Reagan is tied to
trickle down economics. We'll get into the history, like we'll
(08:17):
clear all this up. But he's not really the first
one to implement this, but he's he's tied to it.
But if you look at Reaganomics, the problem is this, chuck.
If if you say, well, the nineties were very prosperous
with the dot com boom um and the the Nasdaq
hit like like a record ten thousand points at like
(08:39):
in the nineties, all that was from Reagan's policies, Well
you can't say that that was from Reagan's policies. We
we don't know. We just simply don't know. Was it
something short term that the Clinton administration was doing, or
was it the long term effects of Reagan's tax cuts.
We don't know, and we're going to get scores of
(08:59):
email from people saying what we do know, but we
don't know, so just send your email. It's fine, but
you're wrong. Uh. Well, I guess we should go ahead
and say too that just The name trickle down was
coined by Will Rogers famous Humorus in the nineteen twenties.
It is not a nineteen eighties thing. It had been
(09:19):
around for a while, and he said, quote, the money
was all appropriated for the top in hopes that it
would trickle down to the needy. And that's where it
started to get. It. U a derogatory feel around that name,
for sure, since the twenties and and over time, um,
especially since the eighties, the people who champion trickle down
(09:42):
economics or this this particular version of trickle down tax
policy have tried to distance themselves from the term trickle
down because it does seem elitist and it seems like
a big wealth transfer, which in fact it is. UM.
Let's let's talk about this. Trickled own policy isn't necessarily
(10:04):
um associated with Reagan's tax cuts. The whole idea behind
trickle down, as I said already, is you take wealth
and you give it to the wealthiest people. That's that's
what's done. It's a wealth transfer, and it's usually done
at a time when you're in an economic slump, so
you're hoping to revitalize things. Yeah, it's the government trying
(10:27):
to smooth out the rough spots in the national economy,
like a k A. Recessions. Um, so you're transferring wealth.
You're transferring wealth though on the premise that that money
is going to be reinvested, reinvigorated, used to reinvigorate the economy. Right,
So it is a wealth transfer, but with the one
we're talking about today specifically, Um, we're talking about Reagan's version.
(10:51):
So it's a wealth transferred through tax cuts. Right. So
when Reagan came into office, Uh, he took over a
tax policy, see where the highest tax rate was like
seventy the highest earners were paying sev on their highest income. Yeah,
and he got that down to about fifty. Yeah, which
(11:12):
is still seems incredibly high today in an age where
we're paying like thirty the highest earners are. So the
point is is Reagan did it through text cuts. Yeah,
but the that doesn't mean like trickle down economics don't
doesn't equal text cuts necessarily, it's down. It's that's that's
(11:33):
one way of putting more money into the hands of
the wealthiest, right Exactly. It's really a question of supply
and demand. And I guess we can go back through
time a little bit to John Baptis, say who you mentioned, uh,
nineteenth century French economists, and his his philosophy has been
misinterpreted a lot as supply creates its own demand. It's
(11:56):
not exactly right. What he was really saying is products
are paid for with products, and money just had like
a temporary function. Um. Yeah, Like if you are somebody
who produces something, when you produce that something, that item,
when you go make that shoe, and you're gonna sell
your shoe, which is for the whole reason you made
(12:16):
the shoe in the first place, and then with that
money you can go use it to buy other goods
and services. So the production of that shoe created a
wage for you, which in turn stimulated consumption demand from
you for something else. Yeah, product is paid for the product.
The misinterpretation that supply creates its own demand is is
(12:38):
just a bastardized version, and that basically means that there
would never be a failed product, like you can just
produce and produce and produce, which isn't sound No, that's insane.
And I think Say would have said that that is
not true as well. Well he did, he did um
during his lifetime even say like well, no, I mean
there it's possible that there is such thing is over production. Sure.
(13:01):
I mean, like if you think about it, like during
the uh the housing market crash, Yeah, it's starting a
few years ago. There was a glut of homes on
the market. And it's not like the people who are
building homes just merrily went on building homes and building
homes and building homes. Like once the demand ceased, they
stopped producing and we still had a glut on the
(13:22):
market and the ones who were still just sinking money
and to build like building just stop basically, and it
was because there was an oversupply because demand had ceased.
So the idea that that if you if you produce it,
demand will come on a short term basis is this
kind of a fallacy. Yeah, But in the earlier days
(13:43):
of this country, a lot of big thinkers agreed with
him like Jefferson. Um. But the tide turned later on
in our country with the introduction of Mr Keynes KEENSI
and economics. Yeah, so we talked about in our audio book.
We did Stuff you should know, super stuff Guide to
the Economy, which is probably super outdated, I wonder, but
(14:07):
there are some I think there's some evergreen content in there. Yeah,
I mean it was like an economics one on one
course with us UM. But so so, the basis of
Says law is that if you stimulate UM production, then
you'll get the economy going again. And it was implemented
(14:28):
for a while like some of the some of the
early twentieth century presidents like Hoover, among others like Harding
and Coolidge J Well JFK. Later, but early on in
the twentieth century, Harding and Coolidge both implemented UM this
kind of what's called supply side policy text policy right
(14:49):
where where if you stimulate production through lowering taxes at
the top, and we'll tell you in a second how
those two are correlated, Um, you can at the economy
going yet Well, Hoover also followed the same policy, and
under Hoover's watch, the Great depression happen. Yeah, which would
cause any just regular thinking person, even if they don't
(15:12):
understand economics, to think, hey, we're doing it wrong. So
Roosevelt came along, That's right. Roosevelt held the opposite view,
and he was very much a Kinesian and he was
operating at the same time that Keynes was writing and
working himself. And John Maynard Kaine said, no, no, no,
you guys have it backwards. You don't stimulate the supply,
(15:34):
you stimulate the demand. Then all of a sudden, if
you have a housing glut and you suddenly have people
who have more money to spend, they'll take care of
your housing glut and then things can get back to normal.
We reach equilibrium again. Yeah. He was about, uh, short
term ideas, short term fixes, maybe lower interest rates, maybe taxes,
(15:56):
fiscal policy, taxes and spending. Basically what you hear a
lot of obout these days. It. You know, Keynesian economics
kind of lasted a long time until probably Kennedy and
then Reagan. It's like there's only been a handful of
US presidents really endorse the trickle down theory. Yeah, like
wholeheartedly since the twentieth century. Um, so Yeah, it's the
(16:17):
Kenzie and policies ruled, and it was very much about
like cutting taxes for the lower and middle and working classes,
increasing taxes for the rich because if you if you're
a government, you still need revenue, right, So you can't
just cut Texas for everybody. If you cut Texas for
one group, you kind of need to increase it for
another because you still need your money coming in. Of course,
(16:39):
you could also take the radical step of figuring out
how to eliminate waste and blow in government. That would
help a lot, but we're not talking about that in
this one. We're talking about trickle down economics. So then
along comes Kennedy who says, hey, or my dad was
pretty rich, so I'm kind of thinking that this trickle
(16:59):
down thing might work, right, So he got into supply
side economics. And then when Reagan came along, he really
championed this whole idea. And it was out of a
result of some guys in the seventies saying, um, there's
this whole other thing that we've been ignoring, which is
this trickle down tax policy that we should implement, and
(17:19):
they got Reagan into it and he implemented it. Yeah,
and Uh, after this message break coming up here in
a sec we're going to talk a little bit about
If it doesn't sound like it makes sense to you,
there's a certain curve that will explain that might clear
it up for you. All right, So we're gonna talk
about the Laugher curve, which was also in Ferry Spueller.
(17:43):
Oh was it? Yeah, he says, Laugher curve. But in
high school had no idea. But no, I was like,
what are those words together? I don't understand. Laugher was
a person l A F F e er and Um.
The Laugher curve helps explain a little bit why trickle
down economics could possibly work. Is that a good neutral
way to say that? I always say so. Uh. The
(18:05):
idea of the Laugher curd curve is that the relationship
between taxes and revenues is a curve instead of a
direct relationship. So at a certain point, let's say you
own a company making choose and you grows ten million
dollars through like the first two financial quarters, and your
tax that let's say, and you know, if you make
(18:26):
any more money, then you're gonna jump up into that
tax uh, tax category. You might slow down production you
might halt the production altogether and say, you know what,
I'm gonna take off the rest of the year, maybe
even put these people out of work for four to
six months furlow, and because I don't want to be
taxed anymore. So if you look at that on a graph,
(18:49):
it's gonna be if you text people, they're not gonna work.
If you text people zero percent, you're not getting any money.
So in the middle of there is the curve, right it.
Basically Laugher's curve suggests that the correlation between UM tax
rates and tax revenue is not totally positive. At some point,
(19:12):
it starts to go back down. Yeah, that's called the
prohibitive range. At a certain point, people don't want to
be text in that range. Yeah, And it's not even
necessarily that they are not working any longer because they
resent being taxed. What Laugher was pointing out is that
there is this prohibitive range, and within the prohibitive range, UM,
(19:33):
you remove the incentive to work. Theoretically, where UM and
Jay mcgrathre wrote this, UH gave a pretty good UM
example where it's like, if you make that money and
you are text, that's tolerable you're still gonna make. You
still get to keep fifty percent for yourself. But when
you're texting that ninety percentile, uh, you're let's say you
(19:57):
were going to make another million dollars, you to give
nine thousand of it to the government. You just get
to keep a hundred thousand. Well, you might decide to
just go and spend the rest of the year at
your beach house with the money that you did make,
not because you resent being texted, because it's just not
worth it to to exert that effort to make that
next million dollars when you just get to keep a
(20:17):
hundred thousand of it. So at that point in that
prohibitive range, the tax policy is effectively keeping people from working,
inducing them to not work any longer, which is bad
for an economy. And that's if you're if your work,
if your income is directly related to your work, right,
you could considerably if you owned a factory or something,
(20:40):
and you didn't have to really exert any problems and
you could still make payroll and all that stuff, it
might be worth it to just leave it to these
other people to make that extra hundred thousand dollars for you,
rather than go off to the beach house. But if
you your effort directly um is tax, then yes, it
would become a distance and toward work. Conceivably, we should
(21:02):
point out Chuck and Jane didn't do a very good
job of doing that in this In this article, Laugher's
curve is a thought experiment. It's not based on data.
It's not um a hard and fast rule or a law.
It's basically an intuitive idea of tax rates and their
effect on tax revenue. Yeah, but if you don't even
(21:24):
have to be a business owner, Let's say you're just
a regular employee that makes a salary, you have a
salary sweet spot as well. You know, if it's great
to get promotions and to get raises, but if you're
really climbing the ladder at a certain point, you might think, man,
I got a big raise, and I'm making barely any
more money than I made before this big promotion because
(21:46):
I've been kicked into a higher tax bracket. So that's
the prohibitive range, and it, you know, can apply to you.
I mean you can't. You don't stop working. No, But
you may say I don't actually want their promotion because
it's going to be more responsibility and really out much
more money. So I'm going to hang out right here
rather than keep going in my little range or whatever
(22:06):
it is. So that's Laugher's curve, and that's a it's
a kind of the basis of trickle down tax policy.
It's the idea that, Okay, there is a point where
you can text too much and now you're actually slowing
down the economy. So based on Laugher's curve, when you're
(22:32):
looking at it through um through trickle down policy, there's
a point. Then that's that, like you said, there's a
sweet spot as far as text revenue goes. And it
creates this seeming paradox where if you cut tax rates
at a certain point, you'll actually increase tax revenue because
(22:53):
people will be incentivized to work more throughout the year.
And the other basis of trickle down theory is that
you are going to put more money or keep more
money with the people at the wealthiest. People who under
this idea are more likely to um invest it back
(23:16):
into the economy, right, and when they do that, supposedly
allegedly the economy booms. Yeah, what you can account for
is just the single person. This has looked at in
the broadest terms, because somebody could make all their money
and just sit on it in the bank, which isn't
reinvesting it. That is a really, really, really big point.
(23:37):
You'll remember back at the beginning of this recession, the
FED was doing everything it could to cheapen lending and
still has been, and uh, it didn't do anything. Come on, like,
you have to take into account things like um insecurity, fear,
(23:58):
um being hum yes, being human, like, we're not necessarily
rationally maximizing actors. Humans are like, there is such thing
as fear and the idea that maybe hoarding money is best.
So what's possible then if you follow this trickle down
tax policy, is you're taking money from everybody else and
(24:21):
giving it to the rich. Or if your head to
spun because you're a fiscal conservative, what you're doing is
allowing the rich to keep more of their income, but
they're not doing anything with it right at least as
a short term fixed that's not a good idea because
you can probably bet that eventually the rich are going
(24:43):
to take that money and invest it back in the economy.
But it's not. Yes, but when's that going to happen?
You can't really say. And part of the other problem
with it is is that you are then also basically
handing money out at a fire sale. You're saying, Hey,
here's a bunch of money invested back in the economy.
(25:04):
And have we mentioned the bargain basement rates you can
get on all of these businesses over here because the
economy is in a recessional Yeah, very much, so, you know.
And it's it's like it is literally a wealth transfer,
and under some circumstances like the recession that we're still
coming out of now, it is a wealth transfer and
(25:26):
an asset transfer, and that the people who have the
most money, the wealthy, also have the most buying power
and they have the best bargains. Yeah. Thomas Sowell is
a is an economist and he um he won't call
it trickle down economics because he thinks it literally benefits
(25:47):
the workers immediately and first because in the idealized version,
they're gonna reinvest in. The very first thing that's going
to happen is they're gonna put people to work and
people are gonna have obs. Uh. So, yeah, you won't.
He's not gonna call it trickle down theory because he
thinks it works literally the opposite way now here. I
(26:08):
read a column in the National Review by him, and
he's like, you will never find a legitimate economist, um
a history of economic theories and policies and analysis. You'll
never find trickle down economics anywhere. Like it drives him
crazy that people call it that because it has such
a negative association, an elitist, wealthy association. Yeah. And you know,
(26:32):
when you if you're during election time or during if
you see these big tax cuts for the wealthy, if
it makes your blood boil because you think they're these
people are obviously in the hip pocket of the politician.
That may be true, but you can still remove yourself
from that and look at the theory itself and does
it work or does it not? And we will do
that after this message. So check. Let's let's do just that,
(27:11):
um passionless rundown of how it trickled down supply side
tax policy works. Yeah, I mean, it's got to be
passionless with me because I have no idea. I can't
argue hard for any side because I read so many
articles disputing one another completely that I have no idea.
(27:33):
So okay, so you're we're in a recession, and there's
a discussion is it supply or dem man that you
want to stimulate. Well, with supply side economics, trickle down
is what you call it in the vernacular. You want
to stimulate the supply because under this belief, if you
(27:53):
stimulate the supply, the um the people who are producing
stuff will have stuff for sale and people will buy it,
and more money will enter the economy and things will
get back to normal because the basis of this is
that people still work during recessions, and since they're working,
(28:19):
they have money to buy things. Not everybody's working. But
you can handle the idea that not everybody's working by
getting production going again, because that creates jobs and that
in turn generates even more income passionless. So how do
you do that, According to trickle down supply side tax policy,
(28:40):
you cut the tax rates of the wealthiest people. You
incentivize them to keep working harder and harder because they
get to keep more and more of it themselves on
the hope that rather than keeping it themselves hoarding, they
will inject it into the economy through things like investing,
(29:02):
expanding their businesses, hiring more people, opening new businesses, and
taking that investment and making more money themselves, but in
the meantime spreading the wealth around through things like wages
and tax revenues through minimum wages. So that is supply
(29:22):
side tax policy, and whether it works or not, the
jury is still out. I did find something from um
fair Economy dot Org, which I have to say, I
don't know whether they're nonpartisan or liberal. They definitely didn't
strike me as conservative, but um so take it however
(29:45):
you want. But they took the UM tax rates, the
top tax rate and it's changes from nineteen fifty four
to two thousand two, and they took the changes to
that tops tech top tex rate, the highest tier, which
is the one you're supposed to cut under this this
type of tax policy, and they juxtaposed it against four
(30:09):
different economic indicators growth in the gross domestic product, which
is kind of like the indicator of the overall health
of the economy, UH income growth rate, which is, you know,
how the average Americans wealth grows, UM, I think, changes
to unemployment, and the growth of the hourly wage. And
(30:30):
they found that the correlation was basically statistically non existent.
That when you lower tax rates or raise tax rates,
but specifically in this case, when you lower the highest
tax rate, it does nothing to improve the GDP, to
improve hourly wages, to improve median wealth. Um. Just just
(30:54):
statistically speaking, over the course of the two lowering the
tax rates did nothing for those things. Yeah, So speaking
from that, and you can say, well, it doesn't really
do anything. Yeah. Well, with with Reaganomics, I think, well again,
I say, most people agree, but no one agrees. Uh,
(31:16):
it did help inflation, if he was it was because
of his policies, but tax revenues didn't seem much change
at all under those policies. Uh. We're not even getting into,
you know, the part of Reaganomics where he kind of
shut down trade with a lot of countries, keep it
in house and the effect that had. And I I've
(31:37):
gotten varying answers on how long after presidency can you
even look back and with a good judgment um of
like the policies really take effect ten years later when
you're gonna see or no, it's more like twenty years
or no, you can see it immediately with short term fixes.
So it's the whole thing is very frustrating because no
(31:58):
one agrees. Everyone thinks they're right. Yeah, that's the frustrating
part is everybody thinks they're right, like Obama's policies are
almost virtually the exact opposite of Reagan's. Well, that's funny
you say that, because that's not necessarily true. He well,
he in that he kept the Bush era tax cuts going.
He's actually kept lower um tax rates than Reagan did.
(32:23):
And Reagan's always pegged with the trickle down economic theory, right,
Obama's got this other one going. It's called quantitative easing.
So with Reagan it was trickled down tax policy. Under
Obama it's trickled down monetary policy, and by pumping money
into the markets through the FED, it's actually helping because
(32:48):
of this income inequality. It's helping the wealthiest Americans by far,
without anything trickling down really to the um, lower working
middle class Americans. So trickle down policy doesn't necessarily just
mean tax policy. You can also mean monetary policy. And
we've got a very specific trickle down policy being carried
(33:13):
out under Obama's entire two terms so far through connoitative easing.
Either way, there's a vast transfer of wealth going on
right now, just as there was in the eighties. Yeah,
i'd suggest people read up on their own if they
uh want to jump in this argument. This one kind
of also once you really start looking into it, especially
(33:35):
if you go beyond like what helps and really step
back and look at what's being done and the effects
of it forget you know, well, my idea is the
best way to to cure recession Theoretically, Like if you
if you just get out of that mindset and you
look at economic policies and you look at them through
(33:57):
the lens of income inequality, then suddenly conservative and liberal
and Democrat and Republican, I'll just kind of fade away,
and basically everybody has reason to feel like they're being
talked out of something very valuable. Yeah, I came up
with the nine D. I'm sure I'm not the first
person to come up with it, Josh and Amis. I
(34:18):
wonder if if you did cut down on the tax
rates for the wealthy to to about where they are now.
This this is like bargain basement tax rates. Frankly, it
used to be at n in the sixties ninety was
the highest. Now it's thirty five ent under Reagan. Much
of the world pays a lot more taxes than we do.
(34:39):
Oh yeah, so thirty. I think it is fair for everybody.
You to say the least if not unfair because it's
so low, But let's say that it's fair. You keep
the tax rates low on the wealthiest earners, and you
let them build up as much money as they want
in their lifetime. But when they die, you text their
(35:02):
estate like there is no tomorrow. And I wonder, first
of all, you increase revenue, but you also prevent dynasties. Uh,
you want to prevent dynasties. Sure. I read an article
about how UM the those who inherit wealth tend to
invest it less, they tend to hoard it more because
(35:23):
they didn't have any means of accumulating wealth other than
a windfall. I think if you just look at it
statistically speaking, and you look at rather than again on
an individual basis, if you look overall, when wealth is
inherited rather than earned, the inherited wealth is less often
invested in ways like um that create new jobs then
(35:47):
the wealth that's earned. And it's the same thing like
if you won the lottery or something like that, you
should be terrified of losing that money because you didn't
do anything to earn it. So there's no guarantee whatsoever
that you will ever earn that money or have that
money again once you spend it. If you amass a
fortune in industry and lose it, you did it once,
(36:08):
there's a likelihood that you could go do it again,
so you're more likely to take more risks with that wealth.
But people work to take care of their families for
generations to come, like that's what their goal is, right.
So let's say you have a hundred million dollars state
and you have one kid, and your state is tax
(36:28):
at when you die, your kids still gets ten million dollars.
If your kid inherited ten million dollars, you're a wealthy
person and your kid inherits ten million dollars. I think
you can get your eternal rest easy knowing that your
kid's gonna be okay with the ten million bucks for
(36:50):
the rest of his or her life. I think that's fair.
That's enough to set them up in business for sure.
That's enough of a leg up that most people don't have.
I uh, that's fine. You don't have to agree with me. Yeah,
I think it's I think it's like when I hear
about Bill Gates is only gonna leave his kids so
much money or whoever was it Bill Gates or Warren
(37:11):
Buffet or someone they both are they pledged like a
significant amount of their their estates right to not to
get leave it just lead that to their children. I
think that's that's great, But I think that's like it
should be a person's choice and the government shouldn't make
that decision for them. Like government making decisions like that
just that makes my blood boil. But that's tax policy, man,
(37:31):
Like they can make that decision while you're alive or
when you die. It's still there your income being taxed
in either way. It's like are they taxing your inheritance
before your death or well, But it isn't tax policy
because josh An nomics isn't. No. But the very fact
that there are taxes and then progressive means that the
wealthiest people pay more. The more you learn, the more
(37:55):
tax you pay. So why does it matter whether it's
now or when it's when you die? And I that's
not an entirely that's kind of a globe interpretation because
I realize what I'm saying is normal taxes now and
then a heavy tax when you die to prevent dynasty's
and to increase revenue. I just don't think it will
disincentivize work, because I think while you're alive, you still
(38:17):
want to make money. People's those the people who are
dedicated to amassing hundreds of millions or billions of dollars.
That's not going to prevent them from making money while
they're alive. It's not you don't think they're still alive
and their kids still get a slice of the pie.
But what about their kids kids and their kids kids, Well,
(38:38):
then it's up to their kid to go out and
through his own effort or her own effort, amass their
own fortune just like everybody else's. Everybody gets to start
at zero, although those rich kids still get that leg
up of ten percent of the estate. That's that's just
my idea. I got your josh Anamics, Josh ms Man,
(38:59):
We're and get some letters for that one. You got
anything else? Uh? And hey, let me say that, like,
I think people should be able to live much more
meagerly than they do. I'm not a proponent of people
leading these lavish, wasteful lifestyles, but I think if you
know you've made your money in a legitimate way, then
that's your right to do so. I guess you know. Yeah,
(39:23):
I wouldn't want some government putting their hand in my
pocket and saying, hey, you worked really hard for all that,
give me of it. Well, I mean, who does Nobody
wants that, especially when you when you look at government
wastefulness or if you don't want a fund war or
something like that, like then it makes it even harder
to bite. Yeah, the whole thing makes me want to
drop out and move to an island or someplace in
(39:46):
the woods, very quiet, to where I don't have to
even think about any of this stuff. I got my
little garden and got my chickens and my goats. You
need to go make some money so you can do that. Yeah,
I want just a little nine bed room house on
like the staff. Yeah, all right, are we done with this?
(40:08):
We're done with trickle down economics. If you want to
learn more about it, you can read this article on
how stuff works dot com. Just type trickle down economics
into the search bar. And since I said search bar's
time for listener mail, I'm gonna call this one. The
waiting is the hardest part. Hey, guys, just found your
podcast a few months ago and I love it. Um.
(40:31):
The reason I'm thanking you is because I have a
bit of a worrying problem. I just sent out my
application to dental school and now I'm playing the waiting game.
Through my waiting I always find myself worrying and wondering
what could happen, even though I know it's not the
best thing for me. Through my long days at work
this summer, listening to you guys really helps me, uh
not only take my mind off the process, but helps
(40:52):
take the bite off my worrying mind and even makes
me laugh out loud while people look at me like
I'm on crack, which by the way, I know all
about through your crack podcast. That was a good one, um.
So thanks for what you do. You're informative and your
humorous podcast makes my day easier, helps me through the
waiting game, and teaches me so much about what I
(41:13):
do not know. By the way, I know it's a
long shot, but if by any chance you read this
on listener mail, please give a shout out to my
fiance Elizabeth. We have less than a year before a
big day. And that is from Caleb Davis. Indicator I
end is that Indiana yeses so Caleb, I was just
(41:33):
making sure there wasn't some new state I didn't know
about in Yes, um so Caleb and Elizabeth from Indo hoo,
congratulations And Caleb, I hope you get into a dental school.
My friend, Uh follow up with us? Does it? Caleb
bright us frequently? Is that the Caleb I'm thinking of? No,
that is not you're thinking to Caleb that won our
(41:53):
contestant at lunch with us? Is that the same Caleb
that writes us sometimes follows us on Twitter? I think, so,
oh hey, what's is? Well? We're gonna say slat. I
don't remember well at any rate. Thanks to all that
Caleb's out there who listen. We appreciate you. All right.
If you're named Caleb, or even if you're not, and
you want to get in touch of this, you can
(42:14):
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(42:36):
on this and thousands of other topics. Is it how
Stuff Works dot com
Hey, everybody, it's me your old pal Josh, And for
this week's s Y s K Selects, I've chosen how
trickle down economics works. It sounds boring, but it will
actually knock your socks off. It's so interesting. And maybe
Ronald Reagan will make an appearance. Who knows. You like
to listen and find out? Enjoy. Welcome to Stuff you
(00:28):
Should Know from House Stuff Works dot com. Hey, welcome
to the podcast. I'm Josh Clark, and there's Charles W.
Chuck Bryant and Jerry and they're snickering and tittering, and
that makes this stuff you should know. Yeah, we've got
sidetracked before. We talking about things that trickle. Names, names
(00:53):
that trickle. Yes, like the famous race car driver Dick Trickle.
You say, road dude, I swear to God look him up.
I will don't image search and just look him up. Okay,
guys specify race car. Yeah, okay, that's a good idea.
You're a Google master with your Google Foo. Yes, and
(01:15):
we the three of us, are apparently all eight years
old again. Uh, speaking of trickle, Chuck, Hey, happy birthday.
That would be quiet. Jerry, you have a big mouth.
You're always talking. Well, I usually remember, but I don't
didn't today, So happy birthday. Thank you. I appreciate it.
And this will be out several weeks later, but all right,
(01:35):
I'll get to relive my birthday all over again. Thanks man.
Have you Chuckers ever seen the movie Ferris Peeler's Day Off? Yeah,
and then we'd go there at some point in this one. Yeah,
because of ben Stein. Yeah, okay, good, so you know
the answer then something the economics. Anyone who do economics? Yeah,
(02:00):
they're an ECON class. The guy who says Bueller Bueller,
that's ben Stein. Remember he had that show when ben
Stein's money which was really his money? Yeah it was,
wasn't it. I think it was like yeah, I think
maybe like they gave it to him if it wasn't
one or came out of a salary, who knows. Um.
But before that show came on, he was in Farriss
(02:22):
Bueller's Day Off as an ECON professor. And I believe
he does have a degree in economics. He's also just
a great actor and vizine pitchman. But what he was
talking about in there, he was clear eyes clear, I
thank you, clear is awesome. Yeah, that's right, that sounded
like not ben Stein. Well that was my That's as
(02:43):
steiny as I get. Anyway, he was talking about voodoo economics,
and voodoo economics was another name for trickle down economics
a k a. Reaganomics. And the person who coined the
term voodoo economics do you know John Hughes, No, Yeah,
it was George Bush Senior. H W I remember that. Yeah.
(03:03):
He he was running in the primaries against Reagan and
for the election before he came on as his vice president,
and he was deriding Reagan's economic policies, specifically his belief
and trickle down economics as voodoo economics because there's some apparently,
some sort of magic to the whole thing that makes
(03:24):
it work rather than sound economic principle. Yeah, it occurred
to me today when I was studying the stuff that
John Hughes picked this very topic to represent the most
boring thing you could talk about. I guess so. And uh,
it took me a few times to to figure it out,
because you know, I don't My brain doesn't skew towards
(03:46):
understanding economics. It's it's tough to do. But I finally did,
and I was like, you know what it's not the
most boring thing ever, It's uh, it's pretty interesting. If
I came around. That means anyone can now it's just
our um our burden to make it interesting to everybody else,
which we've already failed that spectacular. That's right. So let's
(04:10):
talk about this idea first of all, trickle down economics.
UM will explain the whole thing in detail starting in
just a moment, but we should probably say that the
disclaimer if you want to drive a fiscal conservative or
a conservative economists, or just a conservative in general crazy
mentioned trickle down economics, like call what they call supply
(04:34):
side economics trickle down economics. It drives some bonkers. There's like,
there's no such thing as trickle down economics. It's a
derisive term. It's um it doesn't capture the spirit or
the thought behind supply side economics, which is what they've
come around to call it. But back in the day
it was definitely called trickle down economics. And the whole point,
(04:54):
the reason why it was called trickle down economics is
that the idea behind it is if you place wealth
with the wealthiest people, this idea goes, they will take
that money and invested into the economy, which will get
things running again. And as a result, that economic engine
(05:16):
revving up will create more wealth at the top that
trickles down to the lower working and middle classes. Yeah,
Like who better to stimulate the economy than the super rich,
and they will like maybe open a business to put
people to work, and then those workers will benefit and uh,
directly from that investment that that person made. Right, So
(05:39):
this is the whole tree behind it. We should also
disclaim even further that economics as a field is so
far from science it's preposterous. Um. Most economic theory that
you ever will run into from John Maynard Keynes or
Adam Smith or um, John Baptiste, Um. These guys are
(06:03):
talking about pure economies the United States, and I don't
think there's any economy in the world that is a
pure economy, free market economy. The United States has things
like tariffs, and um, we have things like government intervention,
tax policy, monetary policy. There's intervention in the market. So
(06:27):
you can't ever say. We can't say, really what causes
recessions and what brings us out of them, or whether
trickle down economics is effective or if it's not, or
if it is effective. Is it effective in the long
run or the short run? And what about the opposite way,
is that effective in the long run or the short run?
We don't know. That is the thing. That's why like
(06:49):
this kind of stuff can get people's blood boiling. So
like the point of this one is to just talk
about trickle down economics and the theory behind it and
why it may or may not work, and um, on
the caveat that we don't know, and neither do economists. Yeah,
I think I left this at a little frustrated after
my research because I thought I would come away with
an answer. Um. But I mean, if you look up reagonomics,
(07:13):
which is another name for Reagan's version of the supply
side economics, you will find article, well more than that,
but hundred articles on how what a great success it was,
and then the abject failure of reagonomics, and no one
is going to agree. I looked at some of these
theories and said, well, that makes sense in an ideal world.
(07:34):
Then I look at the opposite and think, well that
makes sense in an ideal world. And I don't. I
don't know if you, like you said, I don't know
if you can I don't know if there is an answer.
Even though everyone thinks that they're right, both people can't
be right both sides. No, it's true because these are
very opposite in most cases ideas. Yeah, but what I
did find was a bunch of articles after digging further
(07:55):
that said the failures and successes of Reaganomics. And I
think to me that's probably a little more accurate because
it is in a black and white situation. Well, the
part of the problem is is if you point to
Reagan's text policies, right, and and Reagan is tied to
trickle down economics. We'll get into the history, like we'll
(08:17):
clear all this up. But he's not really the first
one to implement this, but he's he's tied to it.
But if you look at Reaganomics, the problem is this, chuck.
If if you say, well, the nineties were very prosperous
with the dot com boom um and the the Nasdaq
hit like like a record ten thousand points at like
(08:39):
in the nineties, all that was from Reagan's policies, Well
you can't say that that was from Reagan's policies. We
we don't know. We just simply don't know. Was it
something short term that the Clinton administration was doing, or
was it the long term effects of Reagan's tax cuts.
We don't know, and we're going to get scores of
(08:59):
email from people saying what we do know, but we
don't know, so just send your email. It's fine, but
you're wrong. Uh. Well, I guess we should go ahead
and say too that just The name trickle down was
coined by Will Rogers famous Humorus in the nineteen twenties.
It is not a nineteen eighties thing. It had been
(09:19):
around for a while, and he said, quote, the money
was all appropriated for the top in hopes that it
would trickle down to the needy. And that's where it
started to get. It. U a derogatory feel around that name,
for sure, since the twenties and and over time, um,
especially since the eighties, the people who champion trickle down
(09:42):
economics or this this particular version of trickle down tax
policy have tried to distance themselves from the term trickle
down because it does seem elitist and it seems like
a big wealth transfer, which in fact it is. UM.
Let's let's talk about this. Trickled own policy isn't necessarily
(10:04):
um associated with Reagan's tax cuts. The whole idea behind
trickle down, as I said already, is you take wealth
and you give it to the wealthiest people. That's that's
what's done. It's a wealth transfer, and it's usually done
at a time when you're in an economic slump, so
you're hoping to revitalize things. Yeah, it's the government trying
(10:27):
to smooth out the rough spots in the national economy,
like a k A. Recessions. Um, so you're transferring wealth.
You're transferring wealth though on the premise that that money
is going to be reinvested, reinvigorated, used to reinvigorate the economy. Right,
So it is a wealth transfer, but with the one
we're talking about today specifically, Um, we're talking about Reagan's version.
(10:51):
So it's a wealth transferred through tax cuts. Right. So
when Reagan came into office, Uh, he took over a
tax policy, see where the highest tax rate was like
seventy the highest earners were paying sev on their highest income. Yeah,
and he got that down to about fifty. Yeah, which
(11:12):
is still seems incredibly high today in an age where
we're paying like thirty the highest earners are. So the
point is is Reagan did it through text cuts. Yeah,
but the that doesn't mean like trickle down economics don't
doesn't equal text cuts necessarily, it's down. It's that's that's
(11:33):
one way of putting more money into the hands of
the wealthiest, right Exactly. It's really a question of supply
and demand. And I guess we can go back through
time a little bit to John Baptis, say who you mentioned, uh,
nineteenth century French economists, and his his philosophy has been
misinterpreted a lot as supply creates its own demand. It's
(11:56):
not exactly right. What he was really saying is products
are paid for with products, and money just had like
a temporary function. Um. Yeah, Like if you are somebody
who produces something, when you produce that something, that item,
when you go make that shoe, and you're gonna sell
your shoe, which is for the whole reason you made
(12:16):
the shoe in the first place, and then with that
money you can go use it to buy other goods
and services. So the production of that shoe created a
wage for you, which in turn stimulated consumption demand from
you for something else. Yeah, product is paid for the product.
The misinterpretation that supply creates its own demand is is
(12:38):
just a bastardized version, and that basically means that there
would never be a failed product, like you can just
produce and produce and produce, which isn't sound No, that's insane.
And I think Say would have said that that is
not true as well. Well he did, he did um
during his lifetime even say like well, no, I mean
there it's possible that there is such thing is over production. Sure.
(13:01):
I mean, like if you think about it, like during
the uh the housing market crash, Yeah, it's starting a
few years ago. There was a glut of homes on
the market. And it's not like the people who are
building homes just merrily went on building homes and building
homes and building homes. Like once the demand ceased, they
stopped producing and we still had a glut on the
(13:22):
market and the ones who were still just sinking money
and to build like building just stop basically, and it
was because there was an oversupply because demand had ceased.
So the idea that that if you if you produce it,
demand will come on a short term basis is this
kind of a fallacy. Yeah, But in the earlier days
(13:43):
of this country, a lot of big thinkers agreed with
him like Jefferson. Um. But the tide turned later on
in our country with the introduction of Mr Keynes KEENSI
and economics. Yeah, so we talked about in our audio book.
We did Stuff you should know, super stuff Guide to
the Economy, which is probably super outdated, I wonder, but
(14:07):
there are some I think there's some evergreen content in there. Yeah,
I mean it was like an economics one on one
course with us UM. But so so, the basis of
Says law is that if you stimulate UM production, then
you'll get the economy going again. And it was implemented
(14:28):
for a while like some of the some of the
early twentieth century presidents like Hoover, among others like Harding
and Coolidge J Well JFK. Later, but early on in
the twentieth century, Harding and Coolidge both implemented UM this
kind of what's called supply side policy text policy right
(14:49):
where where if you stimulate production through lowering taxes at
the top, and we'll tell you in a second how
those two are correlated, Um, you can at the economy
going yet Well, Hoover also followed the same policy, and
under Hoover's watch, the Great depression happen. Yeah, which would
cause any just regular thinking person, even if they don't
(15:12):
understand economics, to think, hey, we're doing it wrong. So
Roosevelt came along, That's right. Roosevelt held the opposite view,
and he was very much a Kinesian and he was
operating at the same time that Keynes was writing and
working himself. And John Maynard Kaine said, no, no, no,
you guys have it backwards. You don't stimulate the supply,
(15:34):
you stimulate the demand. Then all of a sudden, if
you have a housing glut and you suddenly have people
who have more money to spend, they'll take care of
your housing glut and then things can get back to normal.
We reach equilibrium again. Yeah. He was about, uh, short
term ideas, short term fixes, maybe lower interest rates, maybe taxes,
(15:56):
fiscal policy, taxes and spending. Basically what you hear a
lot of obout these days. It. You know, Keynesian economics
kind of lasted a long time until probably Kennedy and
then Reagan. It's like there's only been a handful of
US presidents really endorse the trickle down theory. Yeah, like
wholeheartedly since the twentieth century. Um, so Yeah, it's the
(16:17):
Kenzie and policies ruled, and it was very much about
like cutting taxes for the lower and middle and working classes,
increasing taxes for the rich because if you if you're
a government, you still need revenue, right, So you can't
just cut Texas for everybody. If you cut Texas for
one group, you kind of need to increase it for
another because you still need your money coming in. Of course,
(16:39):
you could also take the radical step of figuring out
how to eliminate waste and blow in government. That would
help a lot, but we're not talking about that in
this one. We're talking about trickle down economics. So then
along comes Kennedy who says, hey, or my dad was
pretty rich, so I'm kind of thinking that this trickle
(16:59):
down thing might work, right, So he got into supply
side economics. And then when Reagan came along, he really
championed this whole idea. And it was out of a
result of some guys in the seventies saying, um, there's
this whole other thing that we've been ignoring, which is
this trickle down tax policy that we should implement, and
(17:19):
they got Reagan into it and he implemented it. Yeah,
and Uh, after this message break coming up here in
a sec we're going to talk a little bit about
If it doesn't sound like it makes sense to you,
there's a certain curve that will explain that might clear
it up for you. All right, So we're gonna talk
about the Laugher curve, which was also in Ferry Spueller.
(17:43):
Oh was it? Yeah, he says, Laugher curve. But in
high school had no idea. But no, I was like,
what are those words together? I don't understand. Laugher was
a person l A F F e er and Um.
The Laugher curve helps explain a little bit why trickle
down economics could possibly work. Is that a good neutral
way to say that? I always say so. Uh. The
(18:05):
idea of the Laugher curd curve is that the relationship
between taxes and revenues is a curve instead of a
direct relationship. So at a certain point, let's say you
own a company making choose and you grows ten million
dollars through like the first two financial quarters, and your
tax that let's say, and you know, if you make
(18:26):
any more money, then you're gonna jump up into that
tax uh, tax category. You might slow down production you
might halt the production altogether and say, you know what,
I'm gonna take off the rest of the year, maybe
even put these people out of work for four to
six months furlow, and because I don't want to be
taxed anymore. So if you look at that on a graph,
(18:49):
it's gonna be if you text people, they're not gonna work.
If you text people zero percent, you're not getting any money.
So in the middle of there is the curve, right it.
Basically Laugher's curve suggests that the correlation between UM tax
rates and tax revenue is not totally positive. At some point,
(19:12):
it starts to go back down. Yeah, that's called the
prohibitive range. At a certain point, people don't want to
be text in that range. Yeah, And it's not even
necessarily that they are not working any longer because they
resent being taxed. What Laugher was pointing out is that
there is this prohibitive range, and within the prohibitive range, UM,
(19:33):
you remove the incentive to work. Theoretically, where UM and
Jay mcgrathre wrote this, UH gave a pretty good UM
example where it's like, if you make that money and
you are text, that's tolerable you're still gonna make. You
still get to keep fifty percent for yourself. But when
you're texting that ninety percentile, uh, you're let's say you
(19:57):
were going to make another million dollars, you to give
nine thousand of it to the government. You just get
to keep a hundred thousand. Well, you might decide to
just go and spend the rest of the year at
your beach house with the money that you did make,
not because you resent being texted, because it's just not
worth it to to exert that effort to make that
next million dollars when you just get to keep a
(20:17):
hundred thousand of it. So at that point in that
prohibitive range, the tax policy is effectively keeping people from working,
inducing them to not work any longer, which is bad
for an economy. And that's if you're if your work,
if your income is directly related to your work, right,
you could considerably if you owned a factory or something,
(20:40):
and you didn't have to really exert any problems and
you could still make payroll and all that stuff, it
might be worth it to just leave it to these
other people to make that extra hundred thousand dollars for you,
rather than go off to the beach house. But if
you your effort directly um is tax, then yes, it
would become a distance and toward work. Conceivably, we should
(21:02):
point out Chuck and Jane didn't do a very good
job of doing that in this In this article, Laugher's
curve is a thought experiment. It's not based on data.
It's not um a hard and fast rule or a law.
It's basically an intuitive idea of tax rates and their
effect on tax revenue. Yeah, but if you don't even
(21:24):
have to be a business owner, Let's say you're just
a regular employee that makes a salary, you have a
salary sweet spot as well. You know, if it's great
to get promotions and to get raises, but if you're
really climbing the ladder at a certain point, you might think, man,
I got a big raise, and I'm making barely any
more money than I made before this big promotion because
(21:46):
I've been kicked into a higher tax bracket. So that's
the prohibitive range, and it, you know, can apply to you.
I mean you can't. You don't stop working. No, But
you may say I don't actually want their promotion because
it's going to be more responsibility and really out much
more money. So I'm going to hang out right here
rather than keep going in my little range or whatever
(22:06):
it is. So that's Laugher's curve, and that's a it's
a kind of the basis of trickle down tax policy.
It's the idea that, Okay, there is a point where
you can text too much and now you're actually slowing
down the economy. So based on Laugher's curve, when you're
(22:32):
looking at it through um through trickle down policy, there's
a point. Then that's that, like you said, there's a
sweet spot as far as text revenue goes. And it
creates this seeming paradox where if you cut tax rates
at a certain point, you'll actually increase tax revenue because
(22:53):
people will be incentivized to work more throughout the year.
And the other basis of trickle down theory is that
you are going to put more money or keep more
money with the people at the wealthiest. People who under
this idea are more likely to um invest it back
(23:16):
into the economy, right, and when they do that, supposedly
allegedly the economy booms. Yeah, what you can account for
is just the single person. This has looked at in
the broadest terms, because somebody could make all their money
and just sit on it in the bank, which isn't
reinvesting it. That is a really, really, really big point.
(23:37):
You'll remember back at the beginning of this recession, the
FED was doing everything it could to cheapen lending and
still has been, and uh, it didn't do anything. Come on, like,
you have to take into account things like um insecurity, fear,
(23:58):
um being hum yes, being human, like, we're not necessarily
rationally maximizing actors. Humans are like, there is such thing
as fear and the idea that maybe hoarding money is best.
So what's possible then if you follow this trickle down
tax policy, is you're taking money from everybody else and
(24:21):
giving it to the rich. Or if your head to
spun because you're a fiscal conservative, what you're doing is
allowing the rich to keep more of their income, but
they're not doing anything with it right at least as
a short term fixed that's not a good idea because
you can probably bet that eventually the rich are going
(24:43):
to take that money and invest it back in the economy.
But it's not. Yes, but when's that going to happen?
You can't really say. And part of the other problem
with it is is that you are then also basically
handing money out at a fire sale. You're saying, Hey,
here's a bunch of money invested back in the economy.
(25:04):
And have we mentioned the bargain basement rates you can
get on all of these businesses over here because the
economy is in a recessional Yeah, very much, so, you know.
And it's it's like it is literally a wealth transfer,
and under some circumstances like the recession that we're still
coming out of now, it is a wealth transfer and
(25:26):
an asset transfer, and that the people who have the
most money, the wealthy, also have the most buying power
and they have the best bargains. Yeah. Thomas Sowell is
a is an economist and he um he won't call
it trickle down economics because he thinks it literally benefits
(25:47):
the workers immediately and first because in the idealized version,
they're gonna reinvest in. The very first thing that's going
to happen is they're gonna put people to work and
people are gonna have obs. Uh. So, yeah, you won't.
He's not gonna call it trickle down theory because he
thinks it works literally the opposite way now here. I
(26:08):
read a column in the National Review by him, and
he's like, you will never find a legitimate economist, um
a history of economic theories and policies and analysis. You'll
never find trickle down economics anywhere. Like it drives him
crazy that people call it that because it has such
a negative association, an elitist, wealthy association. Yeah. And you know,
(26:32):
when you if you're during election time or during if
you see these big tax cuts for the wealthy, if
it makes your blood boil because you think they're these
people are obviously in the hip pocket of the politician.
That may be true, but you can still remove yourself
from that and look at the theory itself and does
it work or does it not? And we will do
that after this message. So check. Let's let's do just that,
(27:11):
um passionless rundown of how it trickled down supply side
tax policy works. Yeah, I mean, it's got to be
passionless with me because I have no idea. I can't
argue hard for any side because I read so many
articles disputing one another completely that I have no idea.
(27:33):
So okay, so you're we're in a recession, and there's
a discussion is it supply or dem man that you
want to stimulate. Well, with supply side economics, trickle down
is what you call it in the vernacular. You want
to stimulate the supply because under this belief, if you
(27:53):
stimulate the supply, the um the people who are producing
stuff will have stuff for sale and people will buy it,
and more money will enter the economy and things will
get back to normal because the basis of this is
that people still work during recessions, and since they're working,
(28:19):
they have money to buy things. Not everybody's working. But
you can handle the idea that not everybody's working by
getting production going again, because that creates jobs and that
in turn generates even more income passionless. So how do
you do that, According to trickle down supply side tax policy,
(28:40):
you cut the tax rates of the wealthiest people. You
incentivize them to keep working harder and harder because they
get to keep more and more of it themselves on
the hope that rather than keeping it themselves hoarding, they
will inject it into the economy through things like investing,
(29:02):
expanding their businesses, hiring more people, opening new businesses, and
taking that investment and making more money themselves, but in
the meantime spreading the wealth around through things like wages
and tax revenues through minimum wages. So that is supply
(29:22):
side tax policy, and whether it works or not, the
jury is still out. I did find something from um
fair Economy dot Org, which I have to say, I
don't know whether they're nonpartisan or liberal. They definitely didn't
strike me as conservative, but um so take it however
(29:45):
you want. But they took the UM tax rates, the
top tax rate and it's changes from nineteen fifty four
to two thousand two, and they took the changes to
that tops tech top tex rate, the highest tier, which
is the one you're supposed to cut under this this
type of tax policy, and they juxtaposed it against four
(30:09):
different economic indicators growth in the gross domestic product, which
is kind of like the indicator of the overall health
of the economy, UH income growth rate, which is, you know,
how the average Americans wealth grows, UM, I think, changes
to unemployment, and the growth of the hourly wage. And
(30:30):
they found that the correlation was basically statistically non existent.
That when you lower tax rates or raise tax rates,
but specifically in this case, when you lower the highest
tax rate, it does nothing to improve the GDP, to
improve hourly wages, to improve median wealth. Um. Just just
(30:54):
statistically speaking, over the course of the two lowering the
tax rates did nothing for those things. Yeah, So speaking
from that, and you can say, well, it doesn't really
do anything. Yeah. Well, with with Reaganomics, I think, well again,
I say, most people agree, but no one agrees. Uh,
(31:16):
it did help inflation, if he was it was because
of his policies, but tax revenues didn't seem much change
at all under those policies. Uh. We're not even getting into,
you know, the part of Reaganomics where he kind of
shut down trade with a lot of countries, keep it
in house and the effect that had. And I I've
(31:37):
gotten varying answers on how long after presidency can you
even look back and with a good judgment um of
like the policies really take effect ten years later when
you're gonna see or no, it's more like twenty years
or no, you can see it immediately with short term fixes.
So it's the whole thing is very frustrating because no
(31:58):
one agrees. Everyone thinks they're right. Yeah, that's the frustrating
part is everybody thinks they're right, like Obama's policies are
almost virtually the exact opposite of Reagan's. Well, that's funny
you say that, because that's not necessarily true. He well,
he in that he kept the Bush era tax cuts going.
He's actually kept lower um tax rates than Reagan did.
(32:23):
And Reagan's always pegged with the trickle down economic theory, right,
Obama's got this other one going. It's called quantitative easing.
So with Reagan it was trickled down tax policy. Under
Obama it's trickled down monetary policy, and by pumping money
into the markets through the FED, it's actually helping because
(32:48):
of this income inequality. It's helping the wealthiest Americans by far,
without anything trickling down really to the um, lower working
middle class Americans. So trickle down policy doesn't necessarily just
mean tax policy. You can also mean monetary policy. And
we've got a very specific trickle down policy being carried
(33:13):
out under Obama's entire two terms so far through connoitative easing.
Either way, there's a vast transfer of wealth going on
right now, just as there was in the eighties. Yeah,
i'd suggest people read up on their own if they
uh want to jump in this argument. This one kind
of also once you really start looking into it, especially
(33:35):
if you go beyond like what helps and really step
back and look at what's being done and the effects
of it forget you know, well, my idea is the
best way to to cure recession Theoretically, Like if you
if you just get out of that mindset and you
look at economic policies and you look at them through
(33:57):
the lens of income inequality, then suddenly conservative and liberal
and Democrat and Republican, I'll just kind of fade away,
and basically everybody has reason to feel like they're being
talked out of something very valuable. Yeah, I came up
with the nine D. I'm sure I'm not the first
person to come up with it, Josh and Amis. I
(34:18):
wonder if if you did cut down on the tax
rates for the wealthy to to about where they are now.
This this is like bargain basement tax rates. Frankly, it
used to be at n in the sixties ninety was
the highest. Now it's thirty five ent under Reagan. Much
of the world pays a lot more taxes than we do.
(34:39):
Oh yeah, so thirty. I think it is fair for everybody.
You to say the least if not unfair because it's
so low, But let's say that it's fair. You keep
the tax rates low on the wealthiest earners, and you
let them build up as much money as they want
in their lifetime. But when they die, you text their
(35:02):
estate like there is no tomorrow. And I wonder, first
of all, you increase revenue, but you also prevent dynasties. Uh,
you want to prevent dynasties. Sure. I read an article
about how UM the those who inherit wealth tend to
invest it less, they tend to hoard it more because
(35:23):
they didn't have any means of accumulating wealth other than
a windfall. I think if you just look at it
statistically speaking, and you look at rather than again on
an individual basis, if you look overall, when wealth is
inherited rather than earned, the inherited wealth is less often
invested in ways like um that create new jobs then
(35:47):
the wealth that's earned. And it's the same thing like
if you won the lottery or something like that, you
should be terrified of losing that money because you didn't
do anything to earn it. So there's no guarantee whatsoever
that you will ever earn that money or have that
money again once you spend it. If you amass a
fortune in industry and lose it, you did it once,
(36:08):
there's a likelihood that you could go do it again,
so you're more likely to take more risks with that wealth.
But people work to take care of their families for
generations to come, like that's what their goal is, right.
So let's say you have a hundred million dollars state
and you have one kid, and your state is tax
(36:28):
at when you die, your kids still gets ten million dollars.
If your kid inherited ten million dollars, you're a wealthy
person and your kid inherits ten million dollars. I think
you can get your eternal rest easy knowing that your
kid's gonna be okay with the ten million bucks for
(36:50):
the rest of his or her life. I think that's fair.
That's enough to set them up in business for sure.
That's enough of a leg up that most people don't have.
I uh, that's fine. You don't have to agree with me. Yeah,
I think it's I think it's like when I hear
about Bill Gates is only gonna leave his kids so
much money or whoever was it Bill Gates or Warren
(37:11):
Buffet or someone they both are they pledged like a
significant amount of their their estates right to not to
get leave it just lead that to their children. I
think that's that's great, But I think that's like it
should be a person's choice and the government shouldn't make
that decision for them. Like government making decisions like that
just that makes my blood boil. But that's tax policy, man,
(37:31):
Like they can make that decision while you're alive or
when you die. It's still there your income being taxed
in either way. It's like are they taxing your inheritance
before your death or well, But it isn't tax policy
because josh An nomics isn't. No. But the very fact
that there are taxes and then progressive means that the
wealthiest people pay more. The more you learn, the more
(37:55):
tax you pay. So why does it matter whether it's
now or when it's when you die? And I that's
not an entirely that's kind of a globe interpretation because
I realize what I'm saying is normal taxes now and
then a heavy tax when you die to prevent dynasty's
and to increase revenue. I just don't think it will
disincentivize work, because I think while you're alive, you still
(38:17):
want to make money. People's those the people who are
dedicated to amassing hundreds of millions or billions of dollars.
That's not going to prevent them from making money while
they're alive. It's not you don't think they're still alive
and their kids still get a slice of the pie.
But what about their kids kids and their kids kids, Well,
(38:38):
then it's up to their kid to go out and
through his own effort or her own effort, amass their
own fortune just like everybody else's. Everybody gets to start
at zero, although those rich kids still get that leg
up of ten percent of the estate. That's that's just
my idea. I got your josh Anamics, Josh ms Man,
(38:59):
We're and get some letters for that one. You got
anything else? Uh? And hey, let me say that, like,
I think people should be able to live much more
meagerly than they do. I'm not a proponent of people
leading these lavish, wasteful lifestyles, but I think if you
know you've made your money in a legitimate way, then
that's your right to do so. I guess you know. Yeah,
(39:23):
I wouldn't want some government putting their hand in my
pocket and saying, hey, you worked really hard for all that,
give me of it. Well, I mean, who does Nobody
wants that, especially when you when you look at government
wastefulness or if you don't want a fund war or
something like that, like then it makes it even harder
to bite. Yeah, the whole thing makes me want to
drop out and move to an island or someplace in
(39:46):
the woods, very quiet, to where I don't have to
even think about any of this stuff. I got my
little garden and got my chickens and my goats. You
need to go make some money so you can do that. Yeah,
I want just a little nine bed room house on
like the staff. Yeah, all right, are we done with this?
(40:08):
We're done with trickle down economics. If you want to
learn more about it, you can read this article on
how stuff works dot com. Just type trickle down economics
into the search bar. And since I said search bar's
time for listener mail, I'm gonna call this one. The
waiting is the hardest part. Hey, guys, just found your
podcast a few months ago and I love it. Um.
(40:31):
The reason I'm thanking you is because I have a
bit of a worrying problem. I just sent out my
application to dental school and now I'm playing the waiting game.
Through my waiting I always find myself worrying and wondering
what could happen, even though I know it's not the
best thing for me. Through my long days at work
this summer, listening to you guys really helps me, uh
not only take my mind off the process, but helps
(40:52):
take the bite off my worrying mind and even makes
me laugh out loud while people look at me like
I'm on crack, which by the way, I know all
about through your crack podcast. That was a good one, um.
So thanks for what you do. You're informative and your
humorous podcast makes my day easier, helps me through the
waiting game, and teaches me so much about what I
(41:13):
do not know. By the way, I know it's a
long shot, but if by any chance you read this
on listener mail, please give a shout out to my
fiance Elizabeth. We have less than a year before a
big day. And that is from Caleb Davis. Indicator I
end is that Indiana yeses so Caleb, I was just
(41:33):
making sure there wasn't some new state I didn't know
about in Yes, um so Caleb and Elizabeth from Indo hoo,
congratulations And Caleb, I hope you get into a dental school.
My friend, Uh follow up with us? Does it? Caleb
bright us frequently? Is that the Caleb I'm thinking of? No,
that is not you're thinking to Caleb that won our
(41:53):
contestant at lunch with us? Is that the same Caleb
that writes us sometimes follows us on Twitter? I think, so,
oh hey, what's is? Well? We're gonna say slat. I
don't remember well at any rate. Thanks to all that
Caleb's out there who listen. We appreciate you. All right.
If you're named Caleb, or even if you're not, and
you want to get in touch of this, you can
(42:14):
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(42:36):
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