Short Thoughts

Trickle Down Economics - Fact or Fallacy?

It depends
(I am a consultant, that is always my first answer.)
Let's take a few steps back.
What is the "Economy"?
In very basic terms, all that the economy is, is the sum total of activity of people trying to make a living. You have consumers that have Demand for food, clothes and other services, and you have entities that Supply those goods and services.
If the Demand is more or less equal to Supply, then everything moves along fairly smoothly. But if either of these sides of the equation moves too far from equilibrium, then it introduces forces that causes distortion.
And that is (simply put) all that Economics is. A study of what people do, to see whether Supply and Demand are in balance, and if not, what can be done to nudge it closer to balance.
Why can demand be too low?
If Demand is too low, too much unemployment is often the cause, or alternatively pay for the work that is being executed is too low, or in modern times, people do not have access to enough loans or that the prices of available goods and services are too high . But whatever the cause there is not enough money on the Demand side, to purchase all that is Supplied.
As you can see in the graph below, 90% of the population of the USA has done worse than GDP in the last 40 years. And GDP is an amazingly low bar, everybody cheers when it reaches 3% per year. And population growth on its own accounts for around 1 percentage point of that growth. (1/3 of the growth, in other words.)
What this graph says to me is that for the last 40 years, in the USA, there has been a gradual migration of money/wealth/purchasing power from 90% of the people, and being concentrated in the top 10% of the people. The top 10%, is now 50% better off than anybody else compared to 40 years ago.
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Why can Supply be too low?
If Supply is too low, it simply means that not enough goods are being produced. The reasons on the supply side can become a little bit more complex. It can be just because of natural growth constraints on the supply side. (It takes time to build new factories, or expand existing factories) Infrastructure constraints, roads, bridges and railway infrastructure. Or negative sentiment among suppliers causing them not to produce, or to invest in production capacity. Or a lack of labour to operate the factories.
Where is the current imbalance?
It is not easy to determine what is the real causes of any differences in Supply and Demand, and different areas of the economy can be in different situations. But as a very good rule of thumb, if there is inflation in an economy, it means that consumers Demand more than what can be Supplied and are therefor willing to pay more to get what they want. We have not seen inflation in decades.
If interest rates are high, that is also a good indicator that companies can not get the necessary finance to expand their capacity. But interest rates are at historical lows and with the recent tax cuts in the USA, corporations OVERWHELMINGLY bought back shares, rather than expanding capacity to Supply. So production capacity is clearly not a problem
The term Trickle Down Economics is used to promote tax cuts to the rich - the so-called job creators. And because they have more income, they will magically produce more, and the economy will create more jobs. But, corporations will not Supply more, or invest more in capacity so that they can Supply more, if there is not more Demand, or at least the expectation of more Demand.
So trickle-down economics will work, IF the imbalance in the economy is because the Supply side cannot get access to the money needed to increase their Supply.
However it has been many DECADES since the economy had that problem. The problem is a structural imbalance in the way that rewards are distributed through the population.

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