What the Left Gets Wrong about ‘Trickle-Down Economics’
I have a confession to make: one of my favorite publications to read is Jacobin.
“Wait, isn’t that a popular socialist magazine?” Yep, that’s the one. “Don’t you disagree with them on pretty much everything?” Yep, pretty much.
So why do I enjoy Jacobin so much? Because unlike most of the left these days, they aren’t preoccupied with the culture war. Instead, they represent an older version of the left, one that is, refreshingly, focused on more traditional left-wing causes like wealth inequality, labor unions, and so on. In Jacobin I see my natural antagonists, the people who militate directly against the economic system I hold dear: laissez-faire capitalism.
To quote the Joker, my disposition toward Jacobin is essentially “You complete me.” They are the ying to my yang, something I can push back against, a group that I can have a serious argument with. And not only are they directly opposed to my philosophy, they are also some of the most thoughtful, scholarly, and articulate defenders of socialism, and government more broadly. They understand the history of economic thought, they understand libertarianism—sometimes, embarrassingly, even better than us libertarians do. I’m ashamed to admit it, but some of my best education about economics and political philosophy has come from reading Jacobin articles.
To reiterate, I think they get most things wrong, especially on economics. But I see them as worthy, good-faith opponents, opponents who must be taken seriously and contended with.
But enough of saying nice things about Jacobin. You came here for some good old-fashioned mudslinging, so let’s get into it.
A Faulty Appeal to History
A 2023 Jacobin article by Rae Deer opines that “Trickle-Down Economics Has Always Been a Scam.” The “trickle-down” talking point is one of the most common in the leftist playbook—and one of the most annoying—so it seems fitting that we begin Against the Left by blowing this point to smithereens once and for all.
For those who aren’t familiar, this talking point from the left is typically presented as follows:
Right-wing economists favor tax cuts on the rich because they think the extra money held by the rich will “trickle-down” to the poor as the economy moves forward. But trickle-down economics has been debunked. Tax cuts on the rich don’t help the poor, they just make the rich richer.
To make the case that so-called “trickle-down economics” has been debunked, Deer dives into the stories of the Reagan era, the Thatcher era, and the more recent Liz Truss fiasco. The takeaway is a familiar one: Reagan/Thatcher/Truss implemented tax cuts for the rich, and instead of the promised boon for workers, things like wages, unemployment, and inequality only stayed the same or got worse. Therefore, trickle-down economics clearly doesn’t work, QED.
“As we now know, these policies didn’t deliver,” Deer writes about Thatcher’s program. “Tax cuts did not abate unemployment. Concurrent mass privatizations meant unemployment hit 12 percent during the ’80s, with record numbers of people having to sign on for unemployment benefits. The Gini coefficient in the UK rose sharply, from 0.25 to 0.34.”
“[The Laffer Curve’s] failures have been repeatedly and roundly documented,” Deer concludes. “But trickle-down economics keeps limping forward, resurrected time and again by successive governments hoping to justify tax cuts for the rich with false promises of prosperity for all.”
The issue with this supposed debunking should be clear as day to students of Austrian economics. Put simply, there are a million variables in the economy that are constantly changing—regulations, demographics, technology, and so on. Some of these changes are pushing wages, unemployment, and inequality in one direction, others in the opposite direction, and still others have a negligible influence.
In such a circumstance, where multiple important variables are not held constant, how can one possibly infer what the impact of a particular policy change was on the outcome in question? For all we know, lower taxes on the rich might have been doing tremendous good for wages etc., but other factors were simultaneously doing harm, offsetting or more than offsetting the good. Or maybe it was the other way around. The point is, you can’t know just by looking at historical statistics, because you can never isolate a variable in history like you can in a lab.
To give an example, let’s say you’re trying to figure out the impact of Policy X on the Gini coefficient (a measure of wealth inequality). Maybe you predict that Policy X will push the Gini coefficient down. So Policy X gets implemented, and then five years later you check back. Lo and behold, the Gini coefficient is higher than it was before. So, can we conclude that our hypothesis was wrong, that Policy X actually increases the Gini coefficient?
Obviously not, because there are thousands of factors that shape this metric. Maybe there was a huge influx of immigrants in those five years, some super rich and others super poor. Maybe that pushed inequality up even while Policy X was pushing it down. Or maybe other policies offset the downward effects of Policy X. The point is, you can’t know what role Policy X played or didn’t play just by looking at historical data.
The Austrian economist Ludwig von Mises (1881-1973) repeatedly emphasized this point throughout his career. Here’s how he put it in a 1951 lecture titled Pseudo-Science and Historical Understanding:
In the field of human action, we are never in a position of being able to control experiments. …Experience in the field of human action is complicated, produced by the cooperation of various factors, all effecting change.
…Observations of history are always complex phenomena, interconnected in such a way that it is impossible to assign to specific causes, with unquestioned accuracy, a certain part of the final result.
It is this line of reasoning that has given Austrian economists the reputation of being anti-empirical. But the point is not to reject empiricism, simply to understand its limits. And one of those limits is that you can’t draw conclusions from historical facts about the impact of a policy if you can’t control for all the other variables that are participating in shaping the outcome.
Is that really such a radical idea?
Perhaps in anticipation of this line of attack, Deer cites a 2020 London School of Economics paper titled The Economic Consequences of Major Tax Cuts for the Rich. The paper uses a mathematical model with historical data from multiple countries to estimate the causal effect of major tax cuts for the rich. It finds that such tax cuts led to higher income inequality but had no impact on economic growth and unemployment.
The mathematical approach is certainly preferable to simply drawing conclusions based on historical outcomes, because it at least tries to control for all the relevant variables. But a few points are worth stressing:
1) Deer’s reasoning in the article itself still comes across as “these policies were implemented, then these negative outcomes happened, therefore the policies clearly didn’t work.” The fallacy in that method of reasoning is not excused simply because a paper with a better method is also referenced.
2) The mathematical approach is hardly conclusive. Space does not permit a full critique, as this gets to the heart of the Austrian vs. neoclassical debate. Suffice it to say, Deer overstates his case when he concludes from this paper and an IMF report that “The impact of tax cuts for the rich is clear.”
‘Trickle-Down’: Position or Pejorative?
Deer’s methodological missteps aside, many have pointed out a deeper issue with the left’s obsession with so-called “trickle-down” economics: no serious free market economist has ever described their views in these terms.
“No such theory has been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter’s monumental 1,260-page History of Economic Analysis,” Thomas Sowell wrote in his 2012 essay “Trickle Down” Theory and “Tax Cuts for the Rich.” “Yet this non-existent theory has become the object of denunciations from the pages of the New York Times and the Washington Post to the political arena… It is a classic example of arguing against a caricature instead of confronting the argument actually made.”
The late economist Steve Horwitz echoed Sowell’s point in a 2016 FEE article:
The problem with this term is that, as far as I know, no economist has ever used that term to describe their own views. Critics of the market should take up the challenge of finding an economist who argues something like “giving things to group A is a good idea because they will then trickle down to group B.” I submit they will fail in finding one because such a person does not exist.
For a long time my view on this topic was that of Sowell and Horwitz. But upon further reflection, I’ve realized that I’m not completely satisfied with this answer. Specifically, I think it misses an important nuance: “trickle-down” isn’t a position the left is ascribing to free marketers, it’s a pejorative for a position that some free marketers have indeed put forward, which is that, while all tax cuts are of course good for the economy as a whole and therefore indirectly good for the poor, tax cuts for the rich would be especially good for the economy, and therefore for the poor, because the rich are more likely to invest the extra cash.
Pointing out that no one believes in a “trickle-down” mechanism is technically true—and the left should be faulted for their sloppy rhetoric—but it misses the point. The question is: what should we make of the position “tax cuts for the rich are especially beneficial for the economy, and thus for the poor?”
How do I know that free market proponents have made this argument? Because free market economic historian Gary North called them out for it in a 1982 article for The Freeman, pointing out that it was a bad argument!
Here is what North had to say in his (regrettably lengthy and meandering) article, which was titled Trickle-Down Economics:
Trickle-down economics, the critics said, was based on the theory that tax breaks given to the rich would multiply investment, provide jobs, and eventually create increased income for everyone in the economy. In other words, by “giving” the rich more after-tax income, the government would foster economic growth, because the rich are more likely to invest than the poor, since any additional money in their hands would not have to be spent on necessities.
North argued that this view—which he implies was a genuine view held by some free marketers—was misguided because the rich are not a big enough group to make all that much of a difference on economic outcomes. “The hope of people in the economic power of the rich to bring prosperity to a society, whether through redistribution or investment, is a false hope,” he wrote. He went on to say that free market advocates, by seeing the rich as key actors in the economy with the power to shape social outcomes, were falling into “an intellectual trap set for them by the socialists.”
Horwitz, though he doesn’t identify the “investment” argument as the position that “trickle-down” rhetoric is pointing to, seems to agree with North’s conclusion. “Transferring wealth to the rich, or even tax cuts that only apply to them, are not policies that are going to benefit the poor, or certainly not in any notable way,” he writes.
What do I make of the investment argument—the actual position that the “trickle-down” pejorative seems to be referring to? To be honest, I’m not completely sure. I have great respect for North and Horwitz, so my temptation is to defer to their judgement, but I’d like to see a more rigorous analysis from an Austrian perspective of the specific claim that tax cuts for the rich are especially helpful for economic growth, and thus for the poor, compared to other kinds of tax cuts.
In any case, tax cuts specifically for the rich has never been the main argument free marketers have made—though you would be forgiven for thinking so given how much the left harps on this point. As free market economist Murray Rothbard pointed out in his 1970 book Power & Market, the overall level of taxes being as low as possible is, in the free market view, by far what matters most:
It is a major contention of our analysis—in contrast to many other discussions of the subject—that by far the most important impact of taxation results not so much from the type of tax as from its amount. It is the total level of taxation, of government income compared with the income of the private sector, that is the most important consideration. Far too much significance has been attached in the literature to the type of tax—to whether it is an income tax, progressive or proportional, sales tax, spending tax, etc. Though important, this is subordinate to the significance of the total level of taxation.
Now, lower taxes in general pretty much always means lower taxes on the rich, because the rich pay most taxes. But the main thrust of our position is lower taxes as such, not taking it easy on the rich. For what it’s worth, I would be thrilled if we lowered taxes starting with the lowest income brackets and then working our way up. Regardless of the expected impact of taxing the rich less, it seems self-evident that taxing the poor themselves less would be good for the poor, all else equal. How this isn’t a bipartisan issue has always been baffling to me (especially because, as noted above, the tax system is extremely progressive, so the reduction in government revenue that would occur from outright eliminating taxes on, say, the bottom 20%, would not be all that significant).
Having said all that, we also have to keep in mind Milton Friedman’s keen observation that the real tax level is the amount of government spending—so the libertarian position on taxes isn’t so much about hacking away at tax rates as it is about hacking away at government expenditures. And that’s of course when all the howling starts. People love the idea of sending less money to Uncle Sam—but don’t you dare touch their Social Security (or their military spending—the left are not the only ones who are guilty of wanting a big government).
To sum up, the left gets three things wrong on this issue: 1) the appeal to historical outcomes as a method of debunking is completely illegitimate, as discussed above, 2) the “trickle-down” label, though it can be interpreted charitably as referring to the “investment” position, is at best misleading and at worst a blatant strawman, and 3) the left erroneously attributes this argument to the entire free market camp, when Gary North and Steve Horwitz clearly show that this position has never been universally held by free market proponents, and in fact the best criticism of it has come from the free market camp itself.
The reason the left loves to bring this up is of course because it depicts free marketers as naïve simps for the rich. I can appreciate the allure of painting this picture, but at the end of the day I’d take their position a lot more seriously if they dropped the “trickle-down” rhetoric, acknowledged that this isn’t a universal or even predominant position among free marketers, and avoided economic analysis that is rooted in long-debunked fallacious reasoning.