Political Comment (follow-up)

Alright! my first comment (see the previous post)! I now know I have at least one reader, making this effort all worthwhile. And, it comes with a question to boot, which I am happy to address, namely: "How is "spread the wealth" a better economic policy then "trickle down" economic policy? or does it just sound better to those less fortunate?"

First of all, rhetorically speaking, both phrases are meant to appeal to the less fortunate (after all, who is the purported beneficiary of that trickle down?). Trickle down is more clearly tied to a particular policy, though I assume the basis of the question is the Obama campaign's use of the phrase "share the wealth," so I'll address the specifics of his plan related to that concept. Here's how I see the difference:

"Trickle down" is speculative in two senses. First, it is premised on the belief that if money is made available to wealthier individuals and corporations (usually through tax breaks), they will turn around and reinvest the savings in operations that will create jobs, and better pay, for the less well-off members of society. In practice, that is a pretty big if, especially since the nature of the American economy has evolved over the past thirty years or so away from being primarily production-based, and become more centered on what might broadly be called the service sector (including things like sales, insurance, and investment trading). The quality, and pay for the bulk of jobs created in these areas are not as secure or lucrative to middle class Americans as those in the production sector of earlier generations. And that's assuming that the money is actually being re-invested into job-producing enterprises, which is not always (or maybe even often) the case. This is the second element of trickle down's speculative nature: those with cash (or credit) to invest often look for the quickest route to profit, and in recent years, those opportunities were not in true job-producing areas. In the 1980s, it was junk bonds, for example; in the 1990's it was the dot.coms; in recent years it was mortgages. That is, you could make more money quickly by turning over paper until somewhere along the line, someone realized it didn't have inherent value equal to what was paid for it. Sure, plenty of investors got rich on these schemes, but how much of that really trickled down? In the end, this just created massive amounts of debt, which only counts as wealth if you're already pretty rich (remember the old joke: if you owe the bank $200,000 the bank owns you; if you owe the bank $200 million, you own the bank).

As mentioned above, the concept of "spread the wealth" is not by itself tied to any particular method-- trickle down is sold as a means of spreading the wealth too. But the way the phrase is being used in relation to Obama's current tax proposal is certainly different from trickle down. In this instance the idea is that if the tax breaks go to the middle class, they are more likely to spend the money in a way that puts it to work directly into the economy: buying groceries and consumer goods that increase demand on those products and therefore sparks increased supply. They'll make payments on mortgages that provide money back to banks for further investment (as opposed to foreclosing and leaving the banks, and now the government, holding the unpaid bill). They'll send their kids to college, they'll take a vacation, they'll buy a new car, whatever-- they are a much better bet to pump those extra dollars back into the true economy (that is, the economy that creates a flow of wages, goods and services, as opposed to just profits) than the upper 10% have been willing to do in recent years (just look at the figures showing how far the gap has widened between the wealthy and the rest of the country since 1981, when trickle down was embraced by Reagan).

If you are interested, you can find a nice chart summarizing the two candidates' tax plans at the following address:

http://www.washingtonpost.com/wp-dyn/content/story/2008/06/09/ST2008060900950.html

I'd be interested to know if anyone sees any problems with my explanation (and remember, my perspective is that of a historian, not an economist).