Having just had a rant about politicians telling lies, it’s worth noting that sometimes they’re not the source of the lies. Sometimes they don’t have to get creative, they can just recycle someone else’s lies.
The German economist Werner van der Bolluchs is best known for being the first to describe the theory of trickle-down economics.1
Trickle-down economics is the idea that if you make the wealthy wealthier, that wealth will trickle down through society to the lowest levels, making everyone wealthier. Unsurprisingly this is a theory that’s very popular with the wealthy and politicians on the right who suck up to the rich and the heffalumps.
The record-breaking ex-British Prime Minister Liz Truss is very much a fan of the theory
In case you’re not familiar, Liz Truss presided over arguably the biggest train wreck of a British premiership ever. After being voted in by the Conservative Party membership, she tanked the economy and resigned after a mere 49 days. Apparently, in her book she claims she was nobbled by the deep-state establishment and it wasn’t her fault. And despite her disastrous first attempt at being Prime Minister, she hasn’t even written off the possibility of becoming Prime Minister of the UK again, though her constituents may have done, having since voted for a new MP.
I’ve mentioned the Dunning–Kruger Effect before, the psychological effect that describes how people who are least competent at doing something are more likely to overestimate their ability to do that thing.2 Consider Liz Truss the apex example of this theory. She was such an incompetent Prime Minister, that she remains convinced she would still be a great choice for British Prime Minister. She needs to get over it, even the lettuce has moved on.3
Stop me, I’m getting off the point and in fairness Truss isn’t the only one who believes that the best way to make the poor wealthier is to give more money to the rich.
So let’s consider the theory and see if it can stand up to scrutiny. [SPOILER ALERT] It can’t, because it’s an utterly ridiculous idea. Yet it’s been used for decades to pull the wool over the eyes of the poorest and to explain why governments can’t just give money directly to them.
So imagine that we have 2 billion spondoolix. We’re going to split it into two halves.
The first half is going to be distributed to just one person, Mr Lucky-Sod, over the course of 10 years, so he’ll receive 100 million spondoolix every year.
The second half will be distributed to 2,000 people over the same 10 year period, with each of those 2,000 people receiving 50,000 spondoolix every year.
In the first year, Mr Lucky-Sod is pretty sure to go on a spending spree. I’d imagine a big house, a handful of different cars in the big garage, maybe a holiday home by the sea, shopping in the best stores, wearing designer labels and eating out regularly in posh restaurants.
Things will be a bit more modest for the 2,000 people. They’ll maybe rent an apartment or take a mortgage and buy their own home. I imagine they’ll get a car, but more likely something smaller and paid for over a number of years. Their shopping will largely be done on Amazon and local stores and when they eat out once a week, it’s nothing too fancy.
Who’s going to have the biggest impact on the economy in that first year?
In one case a huge amount of money has bought very little. Just five cars, versus 2,000 cars and it’s not just the car sales to consider. One car can contain parts from multiple other businesses. For example, Mr Lucky-Sod’s car purchases will have led to sales of just five car horns, instead of 2,000 car horns. That carries across to all the other parts too.
Two high-end real estate agents will have each earned attractive commissions. Great for them, but 2,000 agents will have earned essential commissions from the other pot of money.
2,000 people will buy a lot more clothes which will contribute to wages for many more workers. 2,000 restaurants and their staff will benefit from the people dining out in more modest establishments.
Unless trying hard, I bet it’ll actually be surprisingly hard to spend the whole 100 million spondoolix, even in the first year when making some big upfront purchases. And after that year, I bet the spending drops off in a big way.
However, the 50,000 spondoolix will probably be spent in its entirety by each and every one of the 2,000 people, meaning all of that money is back and circulating in the economy, having contributed to the wages of thousands and thousands of more people than Mr Lucky-Sod’s money did.
By the end of the 10 years, all 1 billion spondoolix will have been spent by the 2,000 people. Meanwhile, unless he’s got a coke and strippers habit that would make a hedge fund manager blush, it’s likely Mr Lucky-Sod will still have more than half his billion spondoolix, perhaps much more, in the bank or tied up in various investments.
For all that I’ve said though, I guarantee that any half-competent heffalump-loving economist will chuckle lightly to themself and then, in super-patronising tones, explain how, while that naive explanation of the failings of trickle-down economics above may sound plausible, it just demonstrates a complete lack of understanding of the complex concepts of economics.4
In that case, I want you to ask them “which way is down?”
It’s quite possible they’ll point up at the ceiling or the sky and then you’ll know that the poor little lamb is just very confused. What they’re thinking of is what you and I would call trickle-up economics, where all the money flows from the poor up to the wealthy. That is basically how it works.
Should they actually point down though, ask them to explain to you how trickle-down economics really works then. Don’t worry about listening, they’re just going to tell you some bat-ship crazy fantasy they came up with for their kid’s bedtime story last week.
When they finish, ask them this.
“So, if trickle-down economics really works, how come the mystical wealth hasn’t trickled-down to the poorest 50% of Americans who only have 2.5% of all the wealth between them?”
My guess is their answer will be that that’s because we haven’t given enough wealth to the wealthy yet. Just a little bit more and it’ll start trickling down, honest guv’.
You really would have to be a bit dim to think about the trickle-down economics theory in any depth and believe it makes sense.
Yet Liz Truss fell for it so hard she tried to give a load of dosh to the rich as soon as she became Prime Minister and cost the British people an estimated 30 billion squids.5 That equates to over £930 for every UK taxpayer, based on 2021 figures. That may not be very much money to the wealthy, but how would you feel if you took 900 squids out of the bank and when you got home discovered you’d lost it?
I bet you’d be furious with yourself. Truss lost £30 billion and was furious at being pushed out of 10 Downing Street and has never even felt the need to apologise to the British people for losing their money.
To me, she appears to lack the capacity for critical thinking. Tell her she can fly and the quickest way for her to descend from the top of The Empire State Building would be for her to fly down and 9.51 seconds later she’d be an unpleasant stain on the sidewalk.
Gullibility is not a desirable quality in a leader. People who fail to think for themselves are too easily influenced by others who can tease them with tempting views on one thing, while completely hiding equally strong or stronger opposing views.
If you can say something to the weak-minded with enough conviction, they’ll take the one-sided argument at face value. They won’t stop for a moment to think and wonder about alternative views that might be weighed against the original argument.
All it takes is one rich person to explain how you can tax the rich less and you’ll make the poor rich too and they jump on the idea without taking a moment to think it through for themself.
Economics looks like a science, but that ignores the human aspect. We naturally assume that in the world of economics, 1 + 1 = 2 every time, but the odd reality is that isn’t necessarily the case.
The book Thinking Fast and Slow by Daniel Kahneman is a fascinating read, well the first half is, I think I recall the second half was a bit dry. Anyway, if you’ve time, read it until it starts to make your eyes sting, because it will give you some astonishing insights into how you and I and everyone around us behave.
We’re a bunch of mentalists!
In the book, the author describes prospect theory from his work with Amos Tversky. I’m not going to pretend I should be a source of knowledge on prospect theory, but I recall one aspect of it. Hopefully, I’m not embarrassing myself with this simplification of loss aversion. And yes, I know I’m repeating myself, but having written the book’s table of contents in a way that may encourage people to dip in and out, it’s possible you haven’t seen me share this already.
1,000 spondoolix should always equal 1,000 spondoolix, so:
$1,000 = $1,000.
As long as we’re talking about US Dollars, that equation is always true on paper. However, loss aversion states that we feel losses more intensely than we feel gains. So we’ll feel a strong positive feeling if we win $1,000, but the negative feeling at losing $1,000 will be much stronger. Meaning we’ll try harder to avoid losing $1,000 than we will to gain $1,000.
In effect, $1,000 doesn’t equal $1,000. And the greater the amount, the greater the difference.
That’s why someone who doesn’t even have a school-child understanding of economics really should seek out more advice before flicking a switch that drains wealth from the poorest in society (we’re going to touch on this again in Why Don’t Politicians Have A Fiduciary Duty?).
Unfortunately, the most arrogant in society are the ones who listen the least. They also fail to see the contradictions in their positions, as they say whatever feels right at the moment to support their current belief. Truss proudly advocates against big government, yet also believes that the power to make judicial appointments should be removed from an independent body and given to the government. Incidentally, you may recall one of the points in the My Little Autocrat’s Playbook was to take the power to appoint judges.
Taking that power, though, is expanding the reach of the government and giving it greater control. It’s completely the opposite of moving away from big government. Does she want small government or not? Or does it change depending on what point of view she’s arguing for right now? Oh, and I’ll explain why the heffalumps and their supporters push their false narrative about the evils of big government and why big government is actually bad for them and good for us in Big Government vs Small Government.
I keep veering off course, don’t I? It just winds me up the whole Tussonomics thing. We all make stupid mistakes, so I can forgive her that. What I can’t forgive though is the lack of a simple apology for doing something stupid that cost tens of millions of people nearly 1,000 squids each.
She wouldn’t be the first person to have fallen for nonsense theories pushed by experts who use jargon-filled explanations to convince us of something that would otherwise look patently ridiculous.
In most cases, trust your gut. If something doesn’t seem to make sense, that’s probably because it doesn’t.
- He isn’t, he’s made up, I’m talking bolluchs, just like whoever came up with the idea of trickle down economics ↩︎
- https://en.wikipedia.org/wiki/Dunning–Kruger_effect ↩︎
- https://en.wikipedia.org/wiki/Liz_Truss_lettuce ↩︎
- I have misrepresented what heffalump-loving economists prefer to call supply-side economics, rather than trickle down. In brief, the belief is that by reducing taxes on the wealthy, they will invest that money creating new jobs, that create new products that drive prices down, driving demand and sales up, making all of society wealthier and everybody lives happily ever after. Except the wealthy only invest when they know there is demand, not in the hope that there will be demand. The wealthy just want to increase their wealth and they don’t necessarily need to create anything to do that. And if they can’t create more wealth, the next most important thing is to ensure they preserve their existing wealth, so why risk it on something in the hope that demand will appear? ↩︎
- https://www.theguardian.com/politics/2022/nov/12/revealed-the-30bn-cost-of-liz-trusss-disastrous-mini-budget ↩︎