“Trickle down “ as an exotic theory has been discredited in economic fields since…I don’t know that it ever had any credibility. It’s sold politically as “tax cuts will create such a rise in economic activity that they will not only pay for themselves, they will actually increase tax revenue”.
That sounds great, and also it is magical thinking. A tax cut is by definition a lowering of tax revenue. It is stimulative, but you’re spending a dollar to make XX number of cents.
That why deficits always explode after tax cuts, and politicians who champion tax cuts don’t want to cut spending in any meaningful way and immediately throw the US economy into recession.
Deficits they can blame on programs they hate but know are popular with Americans. So we get tax cuts for rich people and have to cut social programs to pay for them.
Anyways, multipliers work like supply side economics was always promised to work but had never delivered. The multiplier effect from increased economic activity. Direct spending is far more efficient than tax cuts.
The multiplier is that 10% gets saved and 90% gets spent for each multiple.
So if the government spends $100, the total increased GDP is as follows:
100 (government spends)
Plus 90 (90% spent)
Plus 81 (90% of $90 spent)
Plus 73 (90% of $81 spent)
Plus 66
Plus 59
…etc.
$100 X (1 / (1 - 0.10)) = $1000
With tax cuts, since there is a savings rate, you lose the initial multiple, which brings it down to $900. For tax cuts among the wealthy you lose an even larger initial multiple because they tend to save more than they spend. So you are probably closer to 800, which would be a 20% loss in GDP
oh i was most definitely around in 2010, and distinctly remember the monthly job numbers threads over and over and over every single month where pinqy had to explain the same thing over and over and over.
Interesting. I think I’m starting to understand. Are we not accounting for the fact of where the government got the $100 in the first place? By taking it from each of those multipliers?
Even if it’s “taken” out, it’s still a net $100 spent / circulated. Who spends it is irrelevant to the math, unless the entity spending saves a percent.
If I take $5 from you and buy something vs. you buying something with your $5, it’s still a net increase of $5 being spent.
Multipliers exist in both supply side / trickle down and demand side Keynesian. The question is which is more effective. The argument against supply side is that tax cuts for the wealthy don’t create a large enough velocity because they don’t spend it.
In your example, if YOU spent the $5 instead of me, yes the multipliers are no different, in terms of a purely mathematical model. If I take $5 from you and spend it on your product, the question is: would you have spent that money anyway, and if so, how much of it?
Either way, during recessions, fiscal and monetary policy try to encourage spending, in order to create multipliers. But trickle down and direct government spending are 2 different methods, with arguably 2 different outcomes of multiplier strength (see the math in my previous post)
