A Quick Mathematical Debunking of Trickle-Down Economics
The thing is, it could work.
The theory of trickle-down economics is a simple one: give money to the people who already have it. With more money in their wallets, they’ll spend more, whether by extravagant purchases (the American Dream) or by creating more jobs, and money will inevitably “trickle down” to the lower classes. Republicans like this theory because they are “the people who already have money,” so obviously it benefits them. Republican voters — who are not the same as Republicans — like this theory because, for once, someone is talking about giving them money. So, in general, this theory is pretty popular.
Unfortunately, it has no mathematical validity.
A fairly smart medieval man named William of Ockham came up with a philosophical idea called “Occam’s Razor” (so called because, apparently, his hometown has changed its spelling — more than once, so far as I can tell). It states that “entities must not be multiplied beyond necessity,” which doesn’t make sense because it’s actually the tail end of the theory. Occam’s Razor states that, if two predictive theories have equal accuracy, the one that has fewer assumptions underpinning it is the one that is more likely correct. It has the fewest “entities” (that are not supposed to be “multiplied beyond necessity”), and that matters. For instance, two explanations for the success of psychics are 1) that they genuinely have extra-sensory perception or 2) that their customers are easily fooled. Since the first theory requires the existence of: souls as non-corporeal but extant entities; a spirit world where they exist, and; means to contact them, whereas the second only requires the existence of gullible human beings, Occam’s Razor instructs us that the second theory is more likely to be correct. I bring this up not because we are going to talk about psychics, but to establish a simple fact: predictive theories are based on assumptions. If X, then Y. Therefore, for any predictive theory, it’s important to look at the X’es they are founded on.
For trickle-down economics, their underlying assumption is this: for every dollar you earn, you will spend a certain percentage of it. Let’s go with the old rule of thumb: 30% on housing payments, 40% on bills and other living expenses, and 30% into savings for a rainy day… okay, 70% of what you earn should be spent. Thus, giving the rich extra money benefits us all because they will continue to spend 70% of their newly-increased largesse. If they make five times as much money as you do, then they will spend five times more than you do. For every shirt you buy at Target they will buy five. For every car you buy, they will buy five (or maybe just a car that’s five times more expensive). For every meal you eat, they will eat five — or, probably, just pay five times more for one. The underlying assumption behind trickle-down economics is that Spending remains proportionally identical (or at least similar) regardless of gross income.
So, is it true?
Do people’s spendings scale up when they earn more money? The answer is clearly Yes. You earn more, you can spend more… and most do. You do buy a better car, or replace an old one. You do buy better food. You do buy a nicer house, or membership at a private school for your children (maybe both). As your salary goes up, so does your spending.
But does spending increase proportionally? If a person is making $50,000 a year and spending 70% of it, what happens if you suddenly gift them a salary of $500,000? Or if we made them a CEO, who in America makes an average of three hundred forty times more money than the average worker? Or, in other words: If I give you X times more money, will you spend X times more than you did before?
Let’s just take lunch as an example. Let’s say you’re a not-particularly-health-conscious American who eats lunch at McDonald’s every day. A Quarter Pounder Value Meal costs about $7.50 ($7.41 to be exact, according to fastfoodmenuprices.com). It’s not the most nutritious meal in the world, but it’s cheap and it’s filling, and sometimes you just gotta play the hand you’re dealt. So you spend, on average, $7.50 a day on lunch.
If trickle-down economics is correct — if every person spends proportionally the same amount of their paycheck on the same things — then, it asserts, CEOs must be spending an average of $2,550 on lunch every day.
I repeat: for trickle-down economics to work, CEOs must be spending more on lunch, every day, than the average family spends on rent every month.
I think we can safely assume this to be an incorrect assertion. Humans can be pretty dumb… but they’re not that dumb. And while humans can be pretty dumb, it’s also (largely) safe to assume that said dumb humans don’t become CEOs.
Balancing it out over the course of the year doesn’t help. Our hypothetical worker is spending $1,875 a year on lunch, while the equally-hypothetical CEO is spending $637,500. It’s fairly obvious that this hypothetical CEO does not exist— or, rather, is not representative of all CEOs. There’s almost certainly someone out there who spends $1 million on lunch every year. Just as almost-certainly, that person is an outlier, unusual even amongst CEOs. You don’t get to be rich by spending money on things you don’t need to. That’s how people get rich — by spending $7.50 on lunch when they could be spending $2,550. Again, it is almost certainly true that the average CEO spends more on lunch than the average worker… but not that much more.
And with that simple thought experiment, we reveal trickle-down economics for what it is: something that sounds good in theory but doesn’t work in practice. Giving rich people more money will increase their spending, but not enough to justify the money you are giving them.
But there is another question to ask: can trickle-down economics be rehabilitated? The answer is obvious: Yes, it can. One way is to do some number-crunching and re-assess the proportions. If CEOs can’t spend 340 times more money than the average worker, then maybe they shouldn’t make 340 times more money than the average worker. How much do CEOs spend on lunch every day? Let’s be really extravagant and say that it’s $75. Very well: if CEOs only spend 10x more on lunch, they only need to be paid 10x more. (Suddenly the company for whom this CEO works for has a shit-ton of money in the bank. Weird.) This could be done by the company, which finally comes to its senses, or it could be done by passing laws. Or we could legally compel those with extra money to, nonetheless, spend that arbitrary 70% of it. Either they put it back into the economy or the government takes it in the form of taxes; either way, the money trickles down.
Funnily enough, you never hear Republicans advocating for either of these solutions, or indeed any solution at all; their championing of trickle-down economics always seems to start and end with the part where we give them more money. It’s almost as though the entire “trickle-down economics” idea is just a sophisticated-sounding excuse to help Republicans get richer… even if it means screwing over Republican voters. And there’s no way that could be true. Right?