Voodoo Economics

Voodoo Economics

We all know about 'trickle down' economics but is what we know true?

Much was said about "trickle down" when President Reagan was in office. Often called "Reaganomics" or "Voodoo" economics by the opposition both of these terms are viewed negatively and are still used to attack tax cut proponents. Thomas Sowell has a different take on trickle down and calls it a myth in his book Basic Economics: A Common Sense Guide to Economy. He makes the point that workers are always paid first and then the profits flow upward later, if at all. Historically tax revenues have, in most cases, gone up when tax rates have been cut. The problem, opponents say, with cutting tax rates is that the benefits are given to the wealthy (in general) in order that they will trickle down to the people. I can not find any support for this straw man argument it in any economic writing or theories.

When advocating a lower rate of taxation, or for less governmental interference in the economy, we are not asking that wealth be transferred to the rich or the "1%" as is claimed. The economic process works in an opposite way. When investments are made, the first money that is spent is in hiring folks to do the work. If you don't hire people to do the work then nothing gets done. When a person starts a business he must pay to get a location for the store, he must pay to set up the store for business, he must pay someone to deliver the products that he will sell in the store, and he must, unless he does all the work himself, hire someone to work in the store. Money goes out first to pay expenses and then later comes back as profits. Of course all businesses do not make a profit and if there is no profit then the business owner has paid out a lot of money and received little or nothing back. The government numbers show that there is a high rate of failures of new businesses. The percent of failures in the first year is 25%, second year is 36%, and the third year is 44%.

Now if we look at those business that are successful and last longer than three years, we see that there will be a number of years from the initial investment to the point that the investor gets a return on his investment. An example that Dr. Sowell uses is an oil company where, from the time that the first exploration for petroleum is started to the time when the first gasoline gets to the pump can be ten or more years. During that time all the employees have been paid and all the other cost to refine the gasoline have been paid. Money is going out before the profit comes back.

To quote Dr. Sowell “In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a 'trickle-down' theory. The workers must be paid first and then the profits flow upward later – if at all.”

Jerry

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