I wrote this up as a comment on another board, and have been asked to make it available as a blog post for easy linking. Someone noted that other people have been arguing that "Trickle Down" doesn't work, leading to the question: "Just what is 'trickle down' and how do we know if it's working?"
This was my answer:
There is a specific economic example of "trickle-down" that basically says that companies under a smaller government-levied financial burden will be more likely to hire new people (provide more jobs) and have a ladder by which people can improve their socio-economic status over time. There are people who seize upon this specific definition, try to find examples where it didn't happen exactly that way, and claim that "it fails" or "it doesn't exist" as a theory *at all* because of it.
But it isn't always going to work exactly like their rigid definition says it should, because, in a free market, companies don't all go on a huge growth stint. In a free market, companies are what they need to be. They go lean when they need to be lean, fat when they need to be fat, and they grow at a natural pace. This rigid definition of "trickle down" happens most obviously when the government is deliberately stunting economic growth (whether intentionally or not) through government policies, in which case removing the artificial limiting factor will result in growth.
The other mistake that they make when insisting that it doesn't work is in looking at living standards compared to the rich, instead of compared to the previous poor. Here's an example. Let's say you have a gym class. Billy starts the year able to do 20 pushups and ends the year able to do 50 pushups. Bob starts the year able to do 2 pushups and ends the year able to do 5. So they start a new exercise program. In next year's class, Jason starts the year able to do 20 pushups and ends the year able to do 100. Jon starts the year able to do 2 pushups and ends the year able to do 10. People claiming that "trickle down doesn't work", by the *same logic*, would claim that the new exercise program has failed in its goal to improve the physical fitness of the lower-performing students.
You guys with me? :) Trying to untwist corkscrews here and lay out their contents clearly!
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Now that's the rigid definition of "trickle down" used to "prove" that "it doesn't work". If you actually look at it as a basic concept being "when the rich are *allowed* to be richer, the poor and middle class do receive the benefits of that", you'll find it all through a free market, profoundly affecting all levels of society. Trickle-down may happen directly, when a rich person can afford a private jet and therefore needs to hire a pilot making $70K/year. Bam, wealth created a job. It may happen the way the rigid definition claims, in which a company has record profits and opens ten new locations in rural markets where they may not have had the infrastructure to serve before, thus opening up a couple hundred new jobs throughout the nation.
It may happen, not through jobs, but through goods and services. Richer people get new furniture and have the old stuff hauled off to Salvation Army to be purchased by lower-class folk. I've seen slightly richer and less 'humble' people who buy a Walmart couch because they refuse to 'take rich people's cast-offs' have to replace a broken couch within a few years; a good quality piece of furniture, even bought used, can last the lifetime of its new owner. As Scott pointed out, the used car market is a prime example of trickle-down. Cash for Clunkers damaged it by focusing mostly on the fairly economical cars that the poorer people buy to replace their gas guzzlers instead of the gas guzzlers themselves, and not rebating enough for the poorer folk to replace their vehicle, thus basically breaking the chain in the middle instead of trimming off the end and arguably causing *more* pollution than if they'd just let the guy making $30K/year junk his '92 Chevy for $200 and buy a '98 Civic for $6K instead.
(A further note on goods: A lot of lower-class families practically depend upon a big circulating wardrobe of free and discounted used clothing, especially for young children, who grow into new sizes very quickly. Toys, books, DVD's... if you can find it sold used and discounted, that means a person who could afford it at its original price bought it new. If they couldn't afford it due to heavier taxes and regulations, they wouldn't have bought it, and you would not have the opportunity to afford it afterwards.)
It may happen through charity. Richer people who aren't hounded into "repaying society" through heavier taxes do often feel a desire to help other people out. Even if they aren't being altruistic, they will still like the good PR and having their names or the names of loved ones on hospital wings and park benches. Food kitchens aren't stocked by the hungry. Our Boy Scout troop and our church periodically have auctions or gift baskets as fundraisers for charities. To get these items, they go to local businesses and ask for, basically, free goodies to 'sell'. That business has to be able to afford to give away a free pedicure, a free pair of movie tickets, a free box of gourmet popcorn, etc.
And finally, it may happen totally indirectly/unconsciously. Have you ever wondered why you can go to Walmart and buy a 55" HDTV for under $500? I learned how it works when I was working at a defense contractor (long story) and listening to the higher-ups complain. Any new fancy appliance or entertainment item (or, for that matter, medical equipment or advancement) has a development cost. Factories also have to spend money to retool for the new item. That cost is factored into the initial price of these items. The only reason why HDTV's aren't still curiosities costing $3000 in the back of Best Buy is because a bunch of rich people bought $3000 HDTV's in the back of Best Buy and basically *paid the cost* of their research and development. Once that's paid off, prices drop sharply, unless another factor intervenes, like scarcity due to other factors. (DVD players are cheaper than VHS players now.)
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Remember back up a few paragraphs where I was talking about opponents/skeptics comparing the rich to the poor over time and claiming that trickle down doesn't happen because of it? The analogy of the kids and the pushups? Part of the reason why I am so content with my own situation is because I compare myself to myself, and I compare my economic status to my economic status. I don't keep up "with the Joneses", and I don't measure success by whether I am richer compared to rich people now than I was compared to rich people then. I do what any *good* school does with classes like Phys Ed and compare myself to myself. As an aside, and to stick with the analogy, my public elementary school was considered to have a poor PE program, in part because the teacher graded students by ability compared to each other; my highschool was considered to have a good program, in part because the teacher graded students by their own improvement. In athletic ability and in economics, that really is the only proper way to do it. And doing so, I come up with this:
My grandparents raised three kids in a 960sqft house. They had one car, one refrigerator, one stove with oven, one washing machine, one television. They saved up and went out for ice cream once a year.
My parents raised five kids (now raising a sixth, adopted) in a 1500(roughly) sqft house. They had two cars, one refrigerator, one dedicated freezer, one stove with oven, a microwave, a washer, a dryer, one television, one VCR, one video game console, one personal computer, and we managed to go out for pizza once every few months or so.
I'm raising three in a 1600sqft house. We had, at the same economic position as parents and grandparents, two cars, one refrigerator with icemaker, one dedicated freezer, one stove with oven, a microwave, washer, dryer, dishwasher, (quality) electric mixer, bread machine, window A/C, two televisions, VCR, DVD player, Blu-Ray player, three video game consoles (Gen 1, Gen 2, Gen 3), two personal computers, two laptops, three tablets, and one cell phone. We also have a monthly eating-out budget.
Am I to believe, then, that I never benefit from the rich being allowed to be rich?
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I'm not going to get into this in detail, but let me offer this thought.
When the government streamlines regulations, lowers regulatory fees, lowers taxes, and doesn't punish wealth accumulation, the poor and middle class benefits in one more way that has nothing whatsoever to do with what the rich do with their money or if they even exist: they are more free to start their own businesses and make their own opportunities, and the social mobility in the country becomes much more fluid. So even if you can't thank the rich for your "new" car, your affordable new market-midrange TV, your kid's scholarship, or your job, you can thank the lower regulatory burden for your ability to afford to start a new business and keep what you earn.
However, this would not actually be part of the specific concept of "trickle down".
