In the recent debate, Vice Presidential candidate Joe Biden said the wealthy would gain by paying higher taxes to lift up the middle class. The theory is that a healthy middle class is necessary for the wealthy class to thrive. Let's call that Trickle Up Economics.

Viewed in that light, the unwealthy are more like an investment opportunity than a tax burden. If you can make the poor and middle class more educated, healthy, and better employed, everyone wins. That makes sense, to a degree. But would the wealthy gain enough financially to make the extra taxes a good investment? I wonder if that has ever been studied.

Perhaps there are too many variables to make any kind of general statement about the benefits of taxing the rich. If the government raises taxes on the wealthy and pisses away the money on sketchy wars and pork, that's probably a poor investment. If the money goes into education, healthcare, and alternative energy, that starts looking a lot more like an investment with a 10-year payoff.

Obviously higher taxes on the rich are counterproductive if it stops them from building new factories, or causes them to invest overseas. Maybe corporate taxes have to remain low no matter what, or everyone moves their operations to Ireland. You can always tax the individuals, since most people won't leave the country just to save money on taxes.

Henry Ford famously paid his factory workers more than the market rate so they would be able to afford cars. I've never seen a study of how that worked out for him. Does anyone have a link to tell me if investing in poor people benefits the rich?
Rank Up Rank Down Votes:  +9
  • Print
  • Share


Sort By:
Oct 29, 2008
The Trickle Up Effect is defined as the economic theory used to describe the flow of wealth from the poor to the affluent.

A common criticism of republicans and capitalism is that the rich get richer and the poor get poorer. Capitalism by definition alone makes this argument just whining. I will make an argument for Trickle Down Economics by exposing and dismantling the Trickle Up Effect (Obamanomics/Clintonomics/FDR’s “Bad Deal”). Look, I like Robin Hood as much as the next guy. I mean that cute, cunning little fox helped all the forest folk by stealing from the evil Sheriff of Nottingham. It was a great story. Well, life’s not a cartoon. Here’s where the lunacy starts.
The trickle up effect states that benefits to the wealthy will be realized due to an increase in sales relative to the amount of benefits that are given to the poor. OK, you got me; I’m intrigued; do go on. The trickle up effect argues itself as more effective than the trickle down effect because people who have less tend to buy more. In other words, the poor are more inclined than the wealthy to spend their money. Why on earth are they poor then? This being so, proponents of the trickle up effect believe that if the lower and lower-middle classes are given benefits(paid for by increased tax rates on businesses and the “wealthy”), such as tax breaks or subsidies, the increased funds would be spent at a much higher rate than would the upper class, given similar fund increases. Furthermore, the trickle up effect argues, many upper-class individuals do not spend their entire yearly salary to begin with, which is an indication that they will not spend any additional funds. You mean being responsible? Instead, they will save additional funds, thereby withholding those funds from the economy and increasing the gap between the rich and the poor. The word withholding is actually slang for re-investing…I know it’s tricky. The trickle up effect avoids this pitfall by giving more money to those who would be more inclined to spend it. So, stop me if you’ve heard enough.
Oct 17, 2008
Maybe not riots and a revolution per se, but I think one strong distinct possibility would be for Obama to, if elected or even before, end like JFK did. He should watch out for convenient and empty book depositories as a matter of course :)

That is, if he doesn't turn out to be as crooked as the rest of them. Then nothing will change.
Oct 14, 2008
The rich already invest in the "poor". But instead of the rich referring to the poor as 'the poor", they are called "consumers".
Oct 13, 2008
but they never did those wonderful things. one fact should destroy any theory. no matter how much you want to belive it. even the old tine consecrative GOP say it did not work. if you get off the tv and read they are all over.
Oct 10, 2008
The Dow Jones Wilshire 5000 has lost over $7 trillion of value in the last 12 months. If the wealthiest 1% truly own 90% of the securities, they just lost about $6.3 trillion. I don't think that is a good place to look for extra tax revenues until all those losses are written off. Is it true "the rich got richer", or are they farting dust too?
Oct 8, 2008
One point - the biggest cause of mortgage defaulting in the states is, correct me if I am wrong, medical bills. Perhaps the whole sorry mess could have been avoided with universal health care? Surely that is the best example of what Scott is talking about. Just sayin'.
+1 Rank Up Rank Down
Oct 7, 2008
This was essentially my argument against Reaganomics, Trickle-down economics, and Bush's tax cuts for the rich:

If you give a rich person a tax cut, what do they do with the extra cash? They already own or can buy everything they need, so mostly they invest it, often in the stock market. In my opinion, and contrary to what I see as popular belief, this only moves wealth, it doesn't create any wealth, or anything at all, except for the investor. (I know that increasing stock prices make companies more valuable, and thus have better credit for expansions and such, but that is in the very long term, assuming they don't just hand over all the cash as options to their overpaid executives.)

OTOH, if you give a poor or even middle class person a tax cut, what do they do with the money? These people need things, so generally that money goes right back out the door to buy food, or clothes, or maybe a new car or whatever. (Statistics show that Americans don't save money, so they aren't likely to save a little extra money.)Now that money is right back into the economy, where it can bubble up though the system. If they buy a car, then that money helps pay people and buy supplies throughout the economy - from engine suppliers down to the espresso stand next to the car dealership where all the salesmen go to ogle the barista (sorry, I veered off track there). Eventually, those dollars end up in the big companies that the rich person would have invested in, not as increased stock value, but as earned income - real money. .And at every step of the way, the government gets a little bit of it back, as local and state sales taxes, as income taxes, whatever.

I would love to know what an economist thinks of this logic (hint, hint)
+2 Rank Up Rank Down
Oct 7, 2008
The BEST possible place to put money for the economy is in the hands of poor, stupid people. (Roll with me on this, despite the 'stupid' comment)

Smart people save money. They either invest it, or they keep it stashed away for emergencies (depending on if they're rich or poor). Rich PEOPLE (not companies, people) aren't likely to start factories - Even if they research it (ie., smart rich, not dumb rich), even if it is a good investment, there are better, and safer, things to invest in already.

But dumb people buy crap. Local crap, in fact! It's like the rich person's "Buy some local crap" tax Scott mentioned in another blog entry, except it's actually likely to work this way :) Dumb rich people buy Rich Crap, though. Designer !$%*!$% converting the wall of their 3-story house into a plasma screen TV, that sort of thing. That helps businesses that are already rich though, so it's limited in use.

But poor, stupid people buy crap from businesses that need people to buy their crap. Walmart, K-mart, whatever general-purpose Crap Store is in your area. That's what happened with the stimulus package, after all. If you put more money (and jobs, even if they aren't the greatest) into the hands and lives or poorer people, they'll buy more local crap. Those businesses prosper and they might actually hire more people instead of firing the check-out clerks (like has been the current trend around here). Customers are happy because you can actually find someone to answer a question every now and then, business is happy because their stockholders aren't throwing feces at them any more, and poorer people are happier because now they have some more money, and a job, and don't necessarily have to worry about kidnapping people off the streets and harvesting their organs for food.

In a way, giving money to poor people prevents an outbreak of cannibalism the likes of which the world has never seen. How can you tell me this isn't the right way to go?

Rich people who invest will get richer because their companies are doing better, so maybe the strain of the taxes on them will be lessened. It makes sense objectively, but I didn't exactly read up on it (clearly.)

Giving rich people more money won't make them more likely to create new businesses. It might make them invest in older businesses who won't be able to improve because nobody can afford their crap. Those businesses, to make their stock prices go up, will fire employees or move out of country so they can pay 10 cents an hour to their workers.

These thoughts follow the premise that the reason rich people are rich is because they don't waste their money on stupid crap, even if the country NEEDS people spending money on that stupid crap to keep going.
-1 Rank Up Rank Down
Oct 7, 2008
Please help me understand, I am obviously ignorant.

Isn't the greatest example of trickle up economics the Clinton administration. That seems to be the gist what I hear the Obama campaign saying.

During the Clinton years I was too busy (got married, started a career, bought first home, punched out a few kids) to pay attention to politics and there is probably a simple answer to my question, I just don't know what it is.

Here's the question: What did Clinton do to grow the economy?

Please don't be too quick to answer. I'm looking for the specific policies that the Clinton administration enacted and their specific measureable economic responses that were not directly confounded with a market pissing all over itself in an ecstatic frenzy of starting businesses in the attempt to get rich off of computers, the internet, or related technology.

Note that I'm using "confounded" in the statistical sense of two inputs that change at the same time and therefore their impacts on the output measure of concern can not be separated.

My impression (and again, I was up to my elbows in diapers during this time) was that the economic prosperity of the 90's was driven by technological advances and the desire of individuals and companies to exploit those advances. Unless Clinton or Gore invented the computer or the internet (I know Gore took credit for the inventing the internet but I believe that has been proven false) then I fail to see what specific Clinton policies grew the economy so fantastically.

Please enlighten me so that I can buy into this trickle up theory of economics that >50% of the nation seems to be buying into so enthusiastically.
Oct 7, 2008
Scott, I would be interested in a demographic breakdown of your blog readers, with an additional breakout of information on your registered users. Perhaps a pop-up survey? I normally ignore any survey foisted upon me via the internet, but would be willing to complete one for you.

I am curious about the diversity of your audience. I see certain trends in the posts and would be interested in the overall background and experience of those participating.
Oct 7, 2008
Wouldn't it make more sense for the rich people to invest directly in alternative energy, etc, rather than launder their money through congress?
Oct 7, 2008
This parallel stinky monkey brains dilbert universe isnt fun - Wheres the exit to cartoonist dilbert?
+3 Rank Up Rank Down
Oct 7, 2008
What if the wealthy invested some of their excess money in universal health care? Then there might be room to treat them in the ER when they have their own heart attacks. Hard to measure the ROI, but it seems like a decent payoff for spending money you won't miss, anyway.

And what if clever investments of excess income resulted poverty reduction to the point that the moderately wealthy felt safe leaving their downstairs windows open? Would being able to turn off their A/C for a few hours result in a significant reduction in energy consumption? In pollution? In environmentally-caused disease? Again, a benefit to the wealthy that's hard to measure.

And what if the most enriching things aren't measured in dollars? What if these investments just result in higher quality of life?
+1 Rank Up Rank Down
Oct 7, 2008
I don't know if the wealthy individually gain as much as they invest, but the return investment of lifting people out of poverty is quite significant, as each undereducated child, criminal adult, and conically poor person represents a substantial loss of revenue (taxes) to society in general. In simple terms poor people are a financial liability, the middle class are a financial asset.
At the moment the rich are paying for the poor (and policing the poor), if you invest in the poor they pay for themselves, and require less policing.
Oct 6, 2008

Oct 6, 2008

Don't know if you'll get to read this post, but you should check out the short story "Horse Racing" by Mary Rosenblum, in the September 2008 issue of Asimov's Science Fiction. It's an interesting tie in to the idea of the rich directly investing in the poor.
-1 Rank Up Rank Down
Oct 6, 2008
On topic...

I think we've seen a great test of trickle-up recently, the stimulus package. We put money directly in the hands of consumers, and it was the best quarter our economy has had in a long time. Clearly, money in consumers hands is more important that money in rich people's hands.

The study I want to see is the dividend tax-break analysis. Assume a high dividend tax that is given as a break to the "consumer class." Those consumers spend the money for products, raising the underlying value of companies (some of which offer dividends). So the question is which gives more value to the shareholder - a low dividend tax or a higher underlying value? (I have no idea, but it's an interesting thing to look at).

Folks like to say that the rich invest in companies and that is where growth comes from. There is another source, companies reinvesting profits. If lots of consumers have money to spend, much of those profits will roll in to fund growth.

I think it's pretty clear that a strong consumer class is more important to an economy than a very rich upper class.
-1 Rank Up Rank Down
Oct 6, 2008
Totally off-topic blog-suggestion:

Did you get a lot of spam/crap-comments in the old blog? (Sorry, I didn't read them, much.) I resisted for a long time registering just to be able to leave a comment on this new blog. You may THINK it's a simple thing, but it's actually a pretty heavyweight process for when someone just wants to leave you with a few additional thoughts.

Heh -- plus, at the rate I leave comments, I'm unlikely to remember my login, so you will have successfully re-filtered me until I get another too-much-spare-time day ;)

Anyway, my suggestion is: open up comments, if there's no compelling reason not to.

Suggestion #2: Consider doing it, anyway, and downgrading your reason to not-particularly compelling.

Or not. It's /your/ blog...

+1 Rank Up Rank Down
Oct 6, 2008
Related podcast. Russ Roberts talks to William Bernstein about the implications of inequality in social status for life expectancy, welfare etc.

Oct 6, 2008
Giving money to the poor might be good, but not giving it to them by way of government. Too much of the money gets siphoned off to pay for bureaucracy. It is a wasteful strategy.
Get the new Dilbert app!
Old Dilbert Blog