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Does the ‘trickle down’ theory really work?
QUESTION: Does the "trickle down" theory really work? When a company does well, do they "share the wealth" with the worker bee, or does that profit tend to all end up in the pockets of management and stock holders? When times are hard, is it the worker that suffers the most, or does management equally bear that burden? What will motivate workers to work more efficiently and be more productive if they don't see any directly measurable change in their paychecks?
— Vicki Wicker, Searcy Ark.

ANSWERS:

Arthur B. Laffer, 'Father of supply-side economics':
“Trickle-down” economics is actually a term used to critique the policies of supply-side economics, most closely associated in the United States with the policies of President Ronald Reagan. You have correctly characterized the way opponents of supply-side economics view how it operates, but those involved in the movement, which incidentally is sweeping the entire globe, including members of the former Soviet Union, would present the argument much differently.

The main idea of supply-side economics is that you can achieve greater economic growth by properly aligning the incentives to induce people to produce goods and services. These incentives should be at the heart of all government decisions. For instance, lower marginal tax-rates lead to greater real after-tax returns on capital, which will lead to increased investment, productivity and output. Perhaps the most obvious application of incentives relates to welfare: If you pay people who don’t work and tax people who do work, don’t be surprised if some people choose not to work.

Now, if government follows the policy suggestions of supply-side economics, by limiting taxes and spending, maintaining sound monetary policy, making trade as free as possible and keeping government regulations to a minimum, economic theory demonstrates that the economy will grow faster than it otherwise would. In such an environment unemployment is also low, leading to a tighter market for labor and thus higher wages. In fact, theory and research both indicate that in an entrepreneurial society, profits accrue first to laborers — each month only after the workers receive their salary and suppliers are paid will the owner or stockholders receive a dime. Thus only after a business is truly successful will profits begin to accrue to the entrepreneurs and stockholders.

If, on the other hand, the government implements bad policies, economic growth will stall and unemployment will rise. With rising unemployment, many workers will now be unemployed and those that retain their jobs will likely see slower earnings growth. So certainly workers will suffer, yet they will not be alone in their suffering. With slower growth, revenues will fall and not all of the fall will be made up through lower labor costs. Profits will fall as well, translating into lower earnings for management and stockholders. Whether or not the burden is shared equally will vary by economic downturn, industry and company, but certainly everyone loses when the government implements poor economic policies.

Bob McTeer, former Federal Reserve bank president:

Www.bobmcteer.com

I’m glad the questioner asked that familiar question so I can say that I’ve never, ever heard anyone advocate a “trickle down” theory or policy. I’ve never heard anyone say, “We’ll make more money at the top and it will trickle down to the workers.”  The “trickle down” label is always a straw man conjured up by one side to pin on the other side in what otherwise might be an intelligent discussion of income distribution. Of course “trickle down” doesn’t work, but nobody ever said it did.

Putting the red herring of trickle down aside, do corporations “share the wealth” with their workers? Yes, but not necessarily out of the goodness of their hearts. They do so because it’s in their own interest to do so in responding to what Adam Smith called the “invisible hand” of a free enterprise system. Smith called attention to the fact that, in a market economy, actions to help ourselves (i.e. maximize profit or income) usually help others as well. Remember, monopoly and fraud aside, those who get really rich in our economy do so by providing a good or service that the public desires and is willing to pay for.

In a free enterprise economy — and most economies are more or less free since the collapse of communism and hard-core socialism — a firm will hire workers, and keep hiring them, as long as the workers add more to the total revenue of the enterprise than they add to total cost. In other words, they hire them as long as it is profitable to do so. Some workers because of their background, education, skills or other advantages may add more to revenue than others; so they will likely earn more. Other workers, with less to offer, will earn less. But all will tend toward incomes that reflect the market value of their contribution to society’s production.

We may not like the outcome of a competitive market place. (My pet peeve is that so many of our richest got that way because they were born with good eye-hand coordination that made them good ball players. But that’s my problem. I’ll get over it.) Some people doing their best may need some help from the rest of us. We may not think the playing field is level enough to be fair, but we should be careful in trying to improve matters. We should strive for equal opportunity and not try to force equal outcomes. We should help people climb the ladder without pulling others down. In our interactive economy, we all benefit from each others’ success.

Robert B. Reich, Clinton administration labor secretary

Perian Flaherty

So-called "trickle-down" economics is a theory that, to its utter misfortune, has been tried in practice and failed. Very little of the gains of economic growth have "trickled down" to average working people.

Thirty years ago, for example, the CEOs of major American companies took home about 25 to 30 times the wages of the typical worker. After the 1970s, the two pay scales diverged. Today, CEO pay packages are about 350 times what the typical worker earns.

When times are hard, CEOs get "golden parachutes" as goodbye gifts. Robert Nardelli, the former CEO of Home Depot, presided over a substantial drop in the firm's share price; but he left the firm with a "golden parachute" worth some $210 million. But the typical worker gets nothing when he or she is forced to leave. Indeed, unemployment insurance is available to fewer than 40 percent of people who lose their jobs.

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