Understanding the Reality of Economic Policies: Debunking Trickle Down Economics

For decades, the concept of 'trickle down economics' has been a bone of contention. Often derided and misunderstood, this term is a misrepresentation of the actual economic theory known as supply side economics. The aim of this article is to clarify these concepts and discuss the real-world implications of economic policies such as real wages and productivity.

The Non-Existence of Trickle Down Economics

Trickle down economics is not a recognized economic term. It is a pejorative term used to describe supply side economics. Supply side economics posits that reducing taxes will encourage work and investment, leading to increased productivity and ultimately benefiting everyone. Contrary to the notion that the rich will share their newfound wealth with others, this theory suggests that increased economic activity and investment will benefit society as a whole.

The Relationship Between Productivity and Wages

Traditionally, there has been a correlation between increased productivity and higher wages. However, this relationship has weakened significantly over the past five decades in the United States. It is crucial to examine the factors that have led to this decoupling of productivity and wages. Despite the weakening correlation, the relationship still arguably exists today.

Investment vs. Consumption

One of the key debates in economics is whether reducing taxes leads to increased consumption or investment. From a supply side perspective, the focus is on encouraging investment, as it has positive externalities. In contrast, redistributing consumption through transfer payments is more aligned with traditional redistributive efforts, which aim to ensure that wealth is distributed more equitably.

While it is not the focus of this article to discuss the morality of redistributive efforts, it is important to note that redistribution of consumption is less prone to unforeseen consequences compared to redirecting investment into consumption. The value of government investment is another point of contention. Not all government spending is investment, and much of it is not wise investment. However, it is essential to question the proportion of government spending allocated to infrastructure versus consumption.

Real-World Examples and Academic Insights

A recent article delves into the topic of real wages and their correlation with productivity. This piece not only provides a comprehensive overview but also includes valuable comments from readers and even one of the authors of the cited studies. These insights shed light on the complexity of the issue and the potential outcomes of different economic policies.

The trickle down theory is often criticized because while the rich pay less in taxes, they are generally believed to be the only ones who pay income taxes. Therefore, when tax cuts are implemented under the guise of supply side economics, they are seen purely as a benefit to the already wealthy. This highlights the need for a more nuanced understanding of economic policies and their real-world impacts.

Conclusion

In conclusion, the concept of 'trickle down economics' is a misnomer and a pejorative term for supply side economics. By understanding the underlying principles of supply side economics and the complex relationships between productivity, wages, and government investment, we can make more informed decisions about economic policies. It is crucial to revisit the value of government investment and to question the allocation of resources to ensure that they are being used wisely for the benefit of all.