Outten & Golden: Empowering Employees in the Workplace

When Trickle-Down Becomes a Drought

July 11th, 2005 | Paula Brantner

A recent New York Times column reported what shouldn’t really be a surprise to those paying attention to workplace economics: “tax cuts for the wealthy made no sense as a policy for stimulating new jobs. ” The idea that tax cuts will cause money to flow downwards from the wealthy who will create jobs as a result, to those working in those jobs, is as bankrupt as the people still having to wait for that trickle. Yet the Administration still clings to the notion that recovery is around the bend.

Robert H. Frank, an economist at the Johnson Graduate School of Management at Cornell University, who writes the “Economic Scene” column for the New York Times each month, decided to take on the principle that tax cuts will stimulate jobs:

The president portrayed his tax cuts as the linchpin of his economic stimulus package. He argued that because most new jobs are created by small businesses, tax cuts to the owners of those businesses would stimulate robust employment growth. His policy thus rests implicitly on the premise that if business owners could afford to hire additional workers, they would.

(See New York Times article.) So there’s the premise: basic trickle-down economics, or supply-side economics, as it has been known since the Reagan Administration. The first President Bush at one point called it “voodoo economics,” but his son is almost certainly under its spell.

But is it working? I’m no economics expert — in fact, I think economics was my worst grade in college. But someone who is an expert, Frank, says it violates a very basic economic principle — one that sounds familiar, even to someone like myself who didn’t learn all that I should have about economics way back when:

The basic hiring criterion, found in every introductory textbook (including those written by the president’s own economic advisers), is straightforward: If the output of additional workers can be sold for at least enough to cover their salaries, they should be hired; otherwise not. If this criterion is met, hiring extra workers makes economic sense, no matter how poor a business owner might be. Conversely, if the criterion is not satisfied, hiring makes no economic sense, even for billionaire owners. The after-tax personal incomes of business owners are irrelevant for hiring decisions.

Aren’t you glad that Congress and the President are working so hard to facilitate an economic policy that would be the wrong answer to a multiple choice question in Econ 101?


More Information:

Short-Changed: profits before people: the income gap
Economic Policy Institute: The Shape of Fiscal Stimulus: Spending vs. Tax Cuts
United for a Fair Economy: Trickle-Down Economics: Four Reasons Why It Just Doesn’t Work

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