Trickle-Down Economics Meets Modern Day Reality

Posted: Jun 15, 2013 12:01 AM

During the 1980s, President Ronald Reagan and his core of economic advisors believed that if tax cuts were imposed on the wealthy, it would benefit every layer of society.  In theory, the multiplier effect of a dollar spent would go something like this: a rich person buys a yacht, the yacht must then be built and the people building the yacht must be paid — including a profit for the owner of the yacht building company.  Accordingly, after cashing their paychecks, each worker then takes their significant other to lunch and dinner.  Of course the upper management team from the yacht building company enjoys high-end dining with waiters, busboys, and maître d’s while the general employees go the fast-food route.  Thus, along with friendly and efficient “drive-thru” attendants and the employees who keep a very watchful eye on the grills and the deep fryers, all the restaurant workers — including those from the high-end establishments and the fast-food locations — subsequently use their pay to buy groceries, gas, cosmetics, liquor, and various thousands of other items.  So, as you can see, this capitalistic system and flow of money was all generated by the purchase of a yacht, the so-called trickle-down effect.  

Thousands of words, various articles, and even hotly contested debates have routinely been the norm to either defend or attack this economic hypothesis.  Whether the theory is true or not, and I believe it’s quite obvious that it is correct, we’ll leave that discussion for another time.    

I imagine, however, that Ronald Reagan, his cohorts, and perhaps even his enemies would be absolutely stunned regarding the conditions of our current trickle-down effect.  During Reagan’s presidency, the natural order of things was as follows: graduate from high school, go to college, graduate from college, get a good job, get married, raise a family, retire at 62, play with the grandchildren, and die.  It might seem that everything is in place to be the same now as it was back then except for “graduate from college,” “get a good job,” and “retire at 62”      — that’s where the new trickle-down effect is having its way.  For a multitude of reasons — not the least of which is overspending, overindulgence, multiple stock market shocks, and a Federal Reserve zero interest-rate policy (ZIRP) — retirees and those approaching retirement have been forced to no longer call it quits at age 62.  In fact, many current retirees are actually attempting to reenter the workforce in very large numbers while those nearing retirement have simply been forced to work longer, thus taking the jobs away from the 40-year-olds.  And the 40-year- olds are seizing the jobs from the college graduates, while the college graduates who don’t find employment in Silicon Valley or on Wall Street are forced to live at home and take on the high school kids’ jobs.  

Given our current economic environment, this very disturbing cycle seems almost irreversible; an unfortunate set of circumstances that I’m quite certain was the furthest thing from Ronald Reagan’s mind when he strongly championed trickle-down economics.