Trickle-down economics

This article is about the political term. For the marketing phenomenon, see trickle-down effect.

"Trickle-down economics", also referred to as "trickle-down theory", is a term associated with laissez-faire capitalism in general and more specifically supply-side economics, used to characterize economic policies as favoring the wealthy or privileged.

In recent history, the phrase has been most used by critics of supply-side economic policies, such as "Reaganomics". David Stockman, who as Reagan's budget director championed Reagan's tax cuts at first, but then became critical of them, told journalist William Greider that the "supply-side economics" is the trickle-down idea: "It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory."[1][2] Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy.[3]

Context

Some macro-economic models assume that a certain proportion of each dollar of income will be saved. This is called the marginal propensity to save. Many studies have found that the marginal propensity to save is considerably higher among wealthier people. However it is unclear whether the reasons are because of variation in accumulated wealth, the consequence of choice (preferences and tastes), or chance.[4] Policies, including tax cuts, that seek to increase saving are often aimed at the wealthy for this reason.[5] All else equal, an exogenous rise in the amount of money saved results in some form of investment in a healthy economy, as it will increase the supply of deposits at banks will reduce the price of borrowing for both the corporate and the household sector, stimulating investment.

Some supply-side economists consider the term "trickle down" as a political pejorative which does not denote any specific economic theory. Economist Thomas Sowell has challenged the term's applicability, writing that the actual path of money in a private enterprise economy is quite the opposite of that claimed by people who refer to the trickle-down theory. He noted that money invested in new business ventures is first paid out to employees, suppliers, and contractors. Only some time later, if the business is profitable, does money return to the business owners—but in the absence of a profit motive, which is reduced in the aggregate by a raise in marginal tax rates in the upper tiers, this activity does not occur.[6][7]

Criticisms

Contrary to popular belief, a decrease of the upper income tax level in the U.S. from 91% to 70% did not stimulate the economy, as annual growth declined from 2.1% per year to 1.5%. The slowest growth actually came during the years with the lowest upper tax rate.[8][9]

The economist John Kenneth Galbraith noted that "trickle-down economics" had been tried before in the United States in the 1890s under the name "horse and sparrow theory." He wrote, "Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: 'If you feed the horse enough oats, some will pass through to the road for the sparrows.'" Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of 1896.[10]

In the 1992 presidential election, Independent candidate Ross Perot called trickle-down economics "political voodoo."[11]

In New Zealand, Labour Party MP Damien O'Connor has, in the Labour Party campaign launch video for the 2011 general election, called trickle-down economics "the rich pissing on the poor".[12]

A 2012 study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy.[13]

In 2013, Pope Francis referred to trickle-down theories (plural) in his Apostolic Exhortation Evangelii Gaudium with the statement (No.54) "Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system."[14]

A 2015 report by the International Monetary Fund argues that there is no trickle-down effect as the rich get richer:

[I]f the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth.[15]

A 2015 report on policy by economist Pavlina R. Tcherneva described the failings of increasing economic gains of the rich without commensurate participation by the working and middle classes, referring to the problematic policies as, "Reagan-style trickle-down economics," and "a trickle-down, financial-sector-driven policy regime."[16]

In 2016 US presidential candidates debate, Hillary Clinton accused Donald Trump of supporting the "most extreme" version of trickle-down economics with his tax plan, saying he "trumped up trickle-down."[17]

History and usage of the term

William Jennings Bryan, who criticized trickle-down theory in his Cross of Gold speech in 1896.

In 1896, Democratic Presidential candidate William Jennings Bryan made reference to trickle-down theory in his famous Cross of Gold speech:

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.[18]

The Merriam-Webster Dictionary notes that the first known use of trickle-down as an adjective meaning "relating to or working on the principle of trickle-down theory" was in 1944,[19] while the first known use of trickle-down theory was in 1954.[20]

After leaving the Presidency, Lyndon B. Johnson, a Democrat, alleged "Republicans [...] simply don't know how to manage the economy. They're so busy operating the trickle-down theory, giving the richest corporations the biggest break, that the whole thing goes to hell in a handbasket."[21]

Speaking on the Senate floor in 1992, Sen. Hank Brown (R-Colorado) said, "Mr. President, the trickle-down theory attributed to the Republican Party has never been articulated by President Reagan and has never been articulated by President Bush and has never been advocated by either one of them. One might argue whether trickle down makes any sense or not. To attribute to people who have advocated the opposite in policies is not only inaccurate but poisons the debate on public issues."[22]

Hoover Institute pundit Thomas Sowell claims that there is no "trickle down" economics as defined by economists, and that the term is almost exclusively used by critics of policies with other established names.[23] Sowell has issued a challenge open to anyone to quote any economist "outside of an insane asylum" who had ever advocated the "trickle-down" theory.[24] Respondents referred him to David Stockman's remarks to William Greider. Sowell replied in his newspaper columns,[25] rejecting the article as an example because Stockman was merely citing "trickle-down" theory as existing. Stockman was using the term to criticize Reaganomics and explicitly labeling supply-side economics as "trickle-down".

Sowell wrote that Stockman "was not even among the first thousand people to make that claim" but that "not one of those who made the claim could provide a single quote from anybody who had advocated a 'trickle-down theory.'"[24]

See also

References

  1. ↑ "The Education of David Stockman" by William Greider
  2. ↑ William Greider. The Education of David Stockman. ISBN 0-525-48010-2
  3. ↑ "Who coined the phrase "trickle-down government" and what does it mean?". english.stackexchange.com.
  4. ↑ "Do the Rich Save More? Karen E. Dynan Jonathan Skinner Stephen P. Zeldes" (PDF). dartmouth.edu.
  5. ↑ Paukert F. Income distribution at different levels of ... garfield.library.upenn.edu/classics1987/A1987J366200001.pdf
  6. ↑ Sowell, Thomas (September 20, 2012). "'Trickle Down' Theory and 'Tax Cuts for the Rich'". Hoover Institution Press. Archived from the original (PDF) on September 24, 2012. [footnote two says:] Some years ago, in my syndicated column, I challenged anyone to name any economist, of any school of thought, who had actually advocated a 'trickle down' theory. No one quoted any economist, politician or person in any other walk of life who had ever advocated such a theory, even though many readers named someone who claimed that someone else had advocated it, without being able to quote anything actually said by that someone else.
  7. ↑ Thomas Sowell. Basic Economics: A Citizen's Guide to the Economy. ISBN 0-465-08138-X
  8. ↑ "In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up". The New York Times. April 12, 2007.
  9. ↑ Figure 5. Real Per Capita GDP Growth Rate and the Top Tax Rates, 1945-2010 pg. 10
  10. ↑ Galbraith, John Kenneth (February 4, 1982) "Recession Economics." New York Review of Books Volume 29, Number 1.
  11. ↑ "Trickle Down", Perot campaign ad
  12. ↑ Chapman, Kate (October 28, 2011). "Labour campaign video harks back to history". Stuff.co.nz. Retrieved October 5, 2016.
  13. ↑ Heather Stewart (July 21, 2012). "Wealth doesn't trickle down – it just floods offshore, research reveals". The Guardian. London. Retrieved August 6, 2012.
  14. ↑ "Evangelii Gaudium : Apostolic Exhortation on the Proclamation of the Gospel in Today's World". vatican.va.
  15. ↑ Era Dabla-Norris; Kalpana Kochhar; Nujin Suphaphiphat; Frantisek Ricka; Evridiki Tsounta (June 15, 2015). Causes and Consequences of Income Inequality : A Global Perspective. International Monetary Fund. Retrieved June 25, 2015.
  16. ↑ Tcherneva, Pavlina (March 2015). "When a Rising Tide Sinks Most Boats: Trends in US Income Inequality" (PDF). Levy Economics Institute. Bard College. Retrieved November 25, 2016.
  17. ↑ Jacob Pramuk (September 26, 2016). "Clinton: Trump would cut taxes for the rich in 'trumped up' trickle down economics". CNBC.
  18. ↑ Bryan's "Cross of Gold" Speech: Mesmerizing the Masses, historymatters.com
  19. ↑ Merriam-Webster Dictionary (online edition) entry for "trickle-down." Accessed September 17, 2010.
  20. ↑ Merriam-Webster Dictionary (online edition) entry for "trickle-down theory." Accessed September 17, 2010.
  21. ↑ Janos, Leo. "The Last Days of the President". theatlantic.com.
  22. ↑ Hank Brown. Congressional Record, March 24, 1992.
  23. ↑ "The Trickle-Down Lie" by Thomas Sowell
  24. 1 2 Sowell, Thomas (June 2, 2006). "The "Trickle Down" Left: Preserving a Vision". Capitalism Magazine. Capitalism Magazine. Retrieved October 14, 2015.
  25. ↑ Sowell, Thomas (April 2, 2005). "Trickle-Down Ignorance". Capitalism Magazine. Capitalism Magazine. Retrieved October 14, 2015.

Further reading

External links

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