Hillary Clinton and Trickle Down Economics

Few utterances in public life over the last 30 years annoy me more than the term, “trickle down economics.”  I know of no economics textbook, treatise, or journal article that even mentions TDE, let alone discusses it as a recognized economic theory or school of thought.  Yet, in her recent speech outlining her economic plan for the future (see here), Democratic presidential candidate and former Secretary of State, Hillary Rodham Clinton, invoked the term several times, asserting that she is not only opposed to TDE but, moreover, would most assuredly not return to that policy as president.  Mrs. Clinton’s opposition to TDE is not new.  It has been a theme in her public utterances for some time.  See here.

I wonder, however, just whom Mrs. Clinton has in mind when she implies that TDE is a policy that her political opponents, specifically the current crop of Republicans running for president, would implement if elected.  I know of none of these Republicans who has said “elect me and I will pursue a policy of trickle down economics.”  Nor, for that matter am I aware of a period in which TDE was the reigning policy of a Republican administration, a period of time to which Mrs. Clinton does not want to return.  Indeed, to my knowledge, only Democrats use the term.

Certainly some of the current Republican candidates have advocated for reductions in marginal tax rates and the elimination of unnecessary regulations on businesses in order to incentivize work, productivity, and saving.  Perhaps policies of this sort are what Mrs. Clinton has in mind.  Yet, the economic theory underlying such supply-side policies is quite different from the description that Mrs. Clinton and other Democrats give to TDE.  According to that description, TDE is about giving more money to the rich in the hope that the rich will immediately spend that additional money on yachts and the like, which eventually will stimulate economic activity that trickles down to the lower income classes.

Supply-side economics, however, is not based on spending.  Quite to the contrary, it is based on the idea – long observed in economic life — that encouraging more work, productivity, and savings results in both immediate increases in aggregate wealth and increases in future wealth.  Future wealth comes about because additional saving provides the means to expand the capital stock.  Economic growth is the end result.  All income classes share in that growth.  Whether or not there is more spending by the rich on yachts is wholly irrelevant.

Milton Friedman was fond of saying, “there are only two kinds of economics — good economics and bad economics.”  Good economics teaches that, if you want growth and rising incomes, the capital stock must increase over time in order to make resources, including labor, more productive.  Increasing the capital stock, in turn, requires saving by those in the best position to save and also that the government exact as little of that saving as possible.  It is not a particularly difficult concept to grasp.  Perhaps even Mrs. Clinton will grasp it someday.