Trickle-down economics

Trickle-down economics is a term used in critical references to economic policies to say they disproportionately favor the upper end of the economic spectrum, i.e. wealthy investors and large corporations. In recent history, the term has been used broadly by critics of supply-side economics.[1] Major examples of US Republicans supporting what critics call "trickle-down economics" include the Reagan tax cuts, the Bush tax cuts[2] and the Tax Cuts and Jobs Act of 2017. [3] As of 2023, a number of studies have failed to demonstrate a link between reducing tax burdens on the upper end and economic growth.

Ronald Reagan's economic policies, dubbed "Reaganomics" by opponents, included large tax cuts and were characterized as trickle-down economics. In this picture, he is outlining his plan for the Economic Recovery Tax Act of 1981 from the Oval Office in a televised address, July 1981.

Trickle-down economics contrasts with the trickle-up effect which is more associated with demand-side economics.

HistoryEdit

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

The concept of trickle down economics, that economic prosperity in the upper classes flows down into the lower classes, is at least 100 years old. It is predominantly used critically.

In 1896, Democratic presidential candidate William Jennings Bryan described the concept using the metaphor of a "leak" in his Cross of Gold speech:[4][5]

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.[6]

In 1982 John Kenneth Galbraith claimed that "trickle-down economics" was known in the 1890s under the name "horse-and-sparrow theory".[7]

William J. Bennett credits humorist and social commentator Will Rogers for coining the term and noted in 2007 its persistent use throughout the decades since.[8] In a 1932 column criticizing Herbert Hoover's policies and approach to The Great Depression Rogers wrote:

This election was lost four and six years ago, not this year. They [Republicans] didn't start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn't know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow's hands. They saved the big banks, but the little ones went up the flue.[9]

In 1933, Indian nationalist and stateman Jawaharlal Nehru wrote positively of the term (in the sense that wealth entered upper classes then "trickled down") in critical reference to the colonial seizing of wealth in India and other territories being a cause of increased the wealth in England:

The exploitation of India and other countries brought so much wealth to England that some of it trickled down to the working class and their standard of living rose." [10]

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[11] while the first known use of "trickle-down theory" was in 1954.[12]

After leaving the presidency, Democrat Lyndon B. Johnson 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."[13]

Presidential speechwriter Samuel Rosenman wrote in 2008 that "trickle down policies" had been prevalent in American government since 1921.[14]

Political scientists Brainard Guy Peters and Maximilian Lennart Nagel in 2020 labeled the idea usually expressed as 'trickle down' a "zombie idea", and stated that it has been the most enduring failed policy idea in American politics. [15] Friedrich Hayek's economic theories have also been described as trickle-down and associated with Margaret Thatcher and Reagan.[16][17]

Despite lack of real-world evidence for the Laffer curve in practice, it is often cited by proponents of trickle-down policy.[18][19]

UsageEdit

While the term "trickle-down" is commonly used to refer to income benefits, it is sometimes used to refer to the idea of positive externalities arising from technological innovation or increased trade. Arthur Okun,[20] and separately William Baumol,[21] for example, have used the term to refer to the flow of the benefits of innovation, which do not accrue entirely to the "great entrepreneurs and inventors", but trickle down to the masses. And Nobel laureate economist Paul Romer used the term in reference to the impact on wealth from tariff changes.[22]

EconomicsEdit

Thomas Sowell consistently argues that trickle-down economics has never been advocated by any economist, writing in his 2012 book "Trickle Down" Theory and "Tax Cuts for the Rich":

Let's do something completely unexpected: Let's stop and think. Why would anyone advocate that we "give" something to A in hopes that it would trickle down to B? Why in the world would any sane person not give it to B and cut out the middleman? But all this is moot, because there was no trickle-down theory about giving something to anybody in the first place.

The "trickle-down" theory cannot be found in even the most voluminous scholarly studies of economic theories - including J. A. Schumpeter's monumental History of Economic Analysis, more than a thousand pages long and printed in very small type.[23]

Sowell has also written extensively on trickle-down economics and opposes its characterization firmly, citing that supply-side economics has never claimed to work in a "trickle-down" fashion. Rather, the economic theory of reducing marginal tax rates works in precisely the opposite direction: "Workers are always paid first and then profits flow upward later – if at all."[24][25]

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", writing:

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 theorized that the horse-and-sparrow theory was partly to blame for the Panic of 1896.[7]

Nobel laureate Joseph Stiglitz wrote in 2015 that the post-World War II evidence does not support trickle-down economics, but rather "trickle-up economics" whereby more money in the pockets of the poor or the middle benefits everyone.[26]

Nobel laureate Paul Krugman has also been sharply critical of trickle-down policies.[27]

A paper by Harvard-Kennedy School social scientist Christopher Jencks found no relationship between top income growth and overall economic growth.[28][29]

In a 2020 research paper, economists David Hope and Julian Limberg analyzed data spanning 50 years from 18 countries, and found that tax cuts for the rich only succeeded at increasing inequality and making the rich wealthier, with no beneficial effect on real GDP per capita or employment. According to the study, this shows that the tax cuts for the upper class did not trickle down to the broader economy.[30][31][32][33]

A 2015 IMF staff discussion note by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka and Evridiki Tsounta suggests that lowering taxes on the top 20% could actually reduce growth.[34][35]

PoliticsEdit

Major examples of US Republicans supporting what critics call "trickle-down economics" include the Reagan tax cuts, the Bush tax cuts and the Tax Cuts and Jobs Act of 2017.[36] In each of the aforementioned tax reforms, taxes were cut across all income brackets, but the biggest reductions were given to the highest income earners,[37] although the Reagan Era tax reforms also introduced the earned income tax credit which has received bipartisan praise for poverty reduction and is largely why the bottom half of workers pay no federal income tax.[38] Similarly, the Tax Cuts and Jobs Act of 2017 cut taxes across all income brackets, but especially favored the wealthy.[39][40]

Ronald Reagan's former budget director, championed Reagan's tax cuts at first, but later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea:[41][42]

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.

— David Stockman, The Atlantic

Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy.[43] Some studies suggest a link between trickle-down economics and reduced growth, and some newspapers concluded that trickle-down economics does not promote jobs or growth, and that "policy makers shouldn't worry that raising taxes on the rich ... will harm their economies".[44][45]

While running against Ronald Reagan for the Presidential nomination in 1980, George H. W. Bush had derided the trickle-down approach as "voodoo economics".[46][47] In the 1992 presidential election, independent candidate Ross Perot also referred to trickle-down economics as "political voodoo".[48] In the same election during a presidential town hall debate, Bill Clinton said:

What I want you to understand is the national debt is not the only cause of [declining economic conditions in America]. It is because America has not invested in its people. It is because we have not grown. It is because we've had 12 years of trickle-down economics. We've gone from first to twelfth in the world in wages. We've had four years where we’ve produced no private-sector jobs. Most people are working harder for less money than they were making 10 years ago.[49]

Speaking on the Senate floor in 1992, Hank Brown (Republican senator for 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."[50]

The political campaign group, Tax Justice Network has used the term referring broadly to wealth inequality in its criticisms of tax havens.[51]

In 2013, Pope Francis referred to "trickle-down theories" in his apostolic exhortation Evangelii Gaudium with the following 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.[52]

In New Zealand, Damien O'Connor, an MP from the Labour Party, called trickle-down economics "the rich pissing on the poor" in the Labour Party campaign launch video for the 2011 general election.[53] In a 2016 presidential candidates debate, Hillary Clinton accused Donald Trump of supporting the "most extreme" version of trickle-down economics with his tax plan, calling it "trumped-up trickle-down" as a pun on his name.[54] In his speech to a joint session of Congress on April 28, 2021, US President Joe Biden stated that "trickle-down economics has never worked".[55] Biden has continued to be critical of trickle-down.[56][57]

A Columbia journal article comparing a failed UK Enterprise Zone proposal to later US proposals references them as a form of trickle-down policy where lower regulatory and tax burdens were aimed at wealthier developers with the hope they would benefit residents. [58]

Political commentator Robert Reich has implicated institutions such as the Heritage Foundation, Cato Institute, and Club for Growth for promoting what he considers to be a discredited idea.[59]

U.S. state of Kansas and governor Sam Brownback's 2018 tax cut package were widely labelled as an attempt at trickle-down economics. [60]

See alsoEdit

ReferencesEdit

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  3. ^ "Trickle-down economics gets new life as Republicans push tax-cut plan". USA Today. Behind [Republican tax legislation of 2017] is a theory long popular among conservatives: Slash taxes for corporations and rich people, who will then hire, invest and profit — and cause money to trickle into the pockets of ordinary Americans.
  4. ^ Wilson, Thomas Frederick. 1992. The Power "to Coin" Money: The Exercise of Monetary Powers by the Congress. Armonk, New York: M. E. Sharpe. p. 172. ISBN 0873327942
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  7. ^ a b Galbraith, John Kenneth (February 4, 1982) "Recession Economics". Archived December 27, 2020, at the Wayback Machine. New York Review of Books Volume 29, Number 1.
  8. ^ Bennett, William J. (2007). America: The Last Best Hope. Harper Collins. p. 78. ISBN 1595551115. Will Rogers referred to the theory that cutting taxes for higher earners and businesses was a "trickle-down" policy, a term that has stuck over the years.
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Further readingEdit

External linksEdit