Where Are the Customers’ Yachts? The Horse and Sparrow Theory of Economics Revisited.

For most books you have to turn the pages to get the message. But the title to Fred Schwed’s 1940 Classic – Where are the Customers’ Yachts? – really needs no further explanation. However, if you crave some elaboration, the “Ancient Story” in the Introduction may be as far as you need to go:

“Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of New York’s financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said:

“‘Look, those are the bankers’ and brokers’ yachts.’

“‘Where are the customers’ yachts?’ asked the naive visitor.”

Schwed began his Wall Street career during the “Roaring Twenties”, the “era of wonderful nonsense,” as he describes it. He adds, “It was [the time of] one of the great universal delusions of history, somewhat comparable to such magnificent errors as that the world was flat, or that all you had to do to heal anybody of anything was to bleed him.”

Of course, we’re living in much more “sophisticated” times than the Roaring Twenties. At least we like to think so.

We don’t bleed patients anymore. But a lot of people are still hung up about vaccines. Others are convinced that evil spirits cause disease. Check out U. S. News’s list of 13 Health Superstitions to Reconsider.

And we have photos of Carl Sagan’s “pale blue dot;” photos of our round earth taken from outer space. “That’s us,” Sagan exudes. “That’s here. That’s home.” Yet, the Flat Earth Society is still alive and prospering. And more than a few folks believe the blue dot photos and Armstrong’s moon landing were faked by NASA.

Then, there’s today’s QAnon conspiracy theory that the world is run by a cabal of Satan worshipers; it’s as popular as some of our major religions.

So, maybe we aren’t as far ahead of the Roaring Twenties as we would like to think.

In fact, there’s a financial theory today, the trickle-down theory, that blossomed after Schwed’s book. But if it had flourished in his time, it would have occupied a special Customer’s Yachts chapter and been included it in his list of the “great universal delusions of history.”

The trickle-down theory is quite simple. The idea is that if our government minimizes taxation and financial regulation of the wealthy and their companies, the benefits they receive will be used to stimulate business, which will produce jobs and income for us all. Ergo, we all benefit substantially.

In the 1980s, critical of Reaganomics, economist John Kenneth Galbraith said that its supply-side economics theory was merely a cover for the trickle-down theory, which “an older and less elegant generation called the horse-and-sparrow theory:”

“If you feed a horse enough oats, some will pass through to the road for the sparrows.”

Sarcastically, he explained that the theory “requires you to believe that businesses and business executives, because of their tax bracket, are now idling away their time….[t]ax reduction will put them back to work. And they will save and invest the income so released – even in Dallas and Palm Springs.”

Galbraith was right. The horse and sparrow theory, renamed the trickle-down theory and, then, in more sophisticated terms, described as the supply-side economic theory, has never really worked. Economics academics call the theory a “zombie idea.” Zombie ideas are “ideas that will not die no matter how often they are disproved.” On this point, Economist Paul Krugman is quite specific:

“In case you’re wondering, a zombie idea is a proposition that has been thoroughly refuted by analysis and evidence, and should be dead — but won’t stay dead because it serves a political purpose, appeals to prejudices, or both. The classic zombie idea in U.S. political discourse is the notion that tax cuts for the wealthy pay for themselves…”

Turns out horse and sparrow is the more accurate metaphor.

The Congressional Research Service is a nonpartisan arm of the Library of Congress that has been advising Congress since 1914. C.R.S.’s research was very helpful to me in my writing Democracy of Dollars. In September 2012, during Obama’s presidency, C.R.S. released a non-partisan congressional report on trickle down economics that concluded:

“The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”

However, when it came to serving as advice to Congress, the report flopped. With the election but a couple of months away, Mitch McConnell and his Republican Senators would have none of the advice and forced the report to be withdrawn. A November 2012 Forbes article, Non-partisan Congressional Tax Report Debunks Core Conservative Economic Theory-GOP Suppresses Study, comments include:

“What do you do when the Congressional Research Service, the completely non-partisan arm of the Library of Congress that has been advising Congress—and only Congress—on matters of policy and law for nearly a century, produces a research study that finds absolutely no correlation between the top tax rates and economic growth, thereby destroying a key tenet of conservative economic theory?

“If you are a Republican member of the United States Senate, you do everything in your power to suppress that report—particularly when it comes less than two months before a national election where your candidate is selling this very economic theory as the basis for his candidacy….

“No matter what party was in charge, the C.R.S. has always endeavored to keep politics out of their work in the effort to provide data that would inform and advance our public policy. Apparently, solid, well researched data no longer matters—at least not when it comes to the Congressional Republicans.”

Ultimately the Democrats had the report reinstated, but, the trickle-down theory continues to dominate the Republicans, most recently when the Trump administration touted its 2017 tax cut package, which primarily benefitted corporations and the wealthy. After the Republican 2017 tax cut bill passed, the Congress Research Service came out with another review of its economic effect, titled The Economic Effects of the 2017 Tax Revision: Preliminary Observations. The 2019 report excluded 2012 Report language that offended McConnell and his clan (e.g., “tax cuts for the rich”). But the conclusion carried similar messages:

• The corporate tax cuts were primarily used to redeem corporate shares to increase shareholder value, and the value of executive stock options, rather than for new investments, pay raises, or new jobs. The Report said, “Much of these funds [corporate tax cuts] has been used for a record-breaking amount of stock buybacks, with $1 trillion announced by the end of 2018.”

• There was no surge in wage growth. But there was a sparrow-effect: a benefit of $28 per each American worker, an amount that, in total, equalled “2% to 3% of the corporate tax cut….”

• Contrary to Republican claims when the 2017 Tax Revision was touted, C.R.S. also reported, “The data appear to indicate that not enough [GDP] growth occurred in the first year to cause the tax cut to pay for itself.”

The fidelity of the horse and sparrow theory of economics metaphor is also supported by the exaggerated growth of the difference between employee and public company CEO compensation. When I was a student at the University of Wisconsin Business School in the early 1950s, the Census Bureau reported that the average wage was about $3,300 and executive compensation was about 20 times that amount. By 2000 the ratio was 120 to 1. By 2017, Forbes reported, CEO annual compensation at S&P 500 companies averaged $13,940,000, or 361 times the average worker’s compensation, which was $38,613. The New York Times reported June 11, 2021 in an article titled Meager Rewards for Workers, Exceptionally Rich Pay for C.E.O.s that during the COVID-19 panic, “68% of the companies with the largest pay packages had wider gaps between executive and employee pay after the pandemic.”

When it comes to taxes, there are some strong views that the wealthy unfairly pay too large a share of our federal taxes. In May 2021, the Wall Street Journal reported in Not Every Quintile Pays Its Fair Share of Tax that in 2018 the National Taxpayers Union reported that the top 10% of taxpayers paid 71.37% of the collected federal income taxes while the bottom 50% paid only 2.94%. But, is that justification for tax breaks? Or is it an indication that the bottom 50% is underpaid? The minimum wage today is $7.50 an hour, and it hasn’t been changed in a dozen years.The Institute for Policy Studies tells us that if the minimum wage had increased as fast as Wall Street bonuses have increased since 1985, the minimum wage would be $44 and the bottom 50% would be paying taxes.

There are some analysts and politicians that take the position income inequality is shrinking, measured by all the “socialized” programs provided by the government to the poor. There are others who insist the very wealthy like the inequality that exists because it produces a servant class they can use at cheap rates. Those debates may add to the discussion but they don’t change the result.

Where are the Customers’ Yachts? Unless we can come to some better understanding about how to close the income gap, a lot of the docks Schwed thought should be reserved for customers will remain vacant. The wealthy elite will still complain about taxes; the bottom 50% of us will suffer with too little income; and the horse and sparrow theory will continue to prevail.

Extra Credit: The video, In Search of a Flat Earth, is highly entertaining.


Poor Folks Have Too Much Money
Republicans give us some strange explanations
For budget deficits gripping all nations.
But do you recall the strangest one of them all?

Poor folks have too much money
And the rich don’t have enough.
Though you think that sounds funny,
That’s the reason times are tough.

Don’t tax the rich; look elsewhere
And I think that you’ll admit
It’s giveaways like welfare
That produced the deficit.

If you feed a horse some hay
Then right before your eyes,
As he canters on his way,
He’ll drop something for the flies.

So give the rich tax rebates.
For they say that “trickle down”
Puts something on poor folks’ plates,
Even though it may be brown.
Stephen Baird, 2004
(To the tune, Rudolph the Rednose Reindeer)

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Good article. I am attaching something I wrote on the same subject a few years back. You can sing it to “Rudolph the Red-nosed Reindeer.” I believe we’re on the same page: Poor Folks Have Too Much Money Republicans give us some strange explanations For budget deficits gripping all nations. But do you recall the strangest one of them all? Poor folks have too much money And the rich don’t have enough. Though you think that sounds funny, That’s the reason times are tough. Don’t tax the rich; look elsewhere And I think that you’ll admit It’s giveaways like welfare That produced the… Read more »