Trickle-down economics

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

Trickle-down economics is a generally critical term for supply-side economics,^[1][2] criticizing such policies as favoring wealthy individuals and large corporations. In the "trickle down" description, wealthy individuals directly benefit from supply-side style tax cuts, leaving only the leftover wealth to "trickle down" to those less fortunate.^[3] The term has been used broadly by critics of supply-side economics to refer to taxing and spending policies by governments that, intentionally or not, result in widening income inequality; it has also been used in critical references to neoliberalism.^[4] While economists who favor supply-side economics generally avoid the "trickle down" analogy and dispute the focus on tax cuts to the rich, the phrase "trickle down" has also been occasionally used by proponents of such policies.^[3][5]

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.

Similar criticisms have existed since at least the 19th century, though the term "trickle-down economics" was popularized in the U.S. in reference to the economic policies of Ronald Reagan.^[1] Major examples of what critics have called "trickle-down economics" in the U.S. include the Reagan tax cuts,^[6] the Bush tax cuts,^[7] and the Tax Cuts and Jobs Act of 2017.^[8] Major UK examples include Liz Truss's mini-budget tax cuts of 2022.^[9] As of 2023, studies have not shown that there is a demonstrable link between reducing tax burdens on the upper end and economic growth.^[10][11][12]

History

Background

 

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

The Google Ngram Viewer shows^[13] that the term "trickle down economics" was rarely seen in published works until the 1980s. However, the concept that economic prosperity in the upper classes flows down into the lower classes is at least 100 years old. The term itself is used mostly by critics of the concept. 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^[14] while the first known use of "trickle-down theory" was in 1954.^[15]

In 1896, United States Democratic presidential candidate William Jennings Bryan described the concept using the metaphor of a "leak" in his Cross of Gold speech:^[16][17]

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]

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.^[19] 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.^[20]

In 1933, Indian nationalist and statesman 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."^[21]

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."^[22]

Presidential speechwriter Samuel Rosenman wrote in 2008 that "trickle down policies" had been prevalent in American government since 1921.^[23]

Reagan years

Ronald Reagan launched his 1980 campaign for the presidency on a platform advocating for supply-side economics. During the Presidential nomination in 1980, George H. W. Bush had derided Reagan's economic approach as "voodoo economics".^[24][25] Following Reagan's election, the "trickle-down" reached wide circulation with the publication of "The Education of David Stockman" a December 1981 interview of Office of Management and Budget director David Stockman, in the magazine Atlantic Monthly. In the interview, Stockman was sharply critical of supply side economics, telling journalist William Greider that the Kemp–Roth Tax Cut was a way to rebrand a tax cut for the top income bracket to make it easier to pass into law:^[26][27]

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.^[28] In 1982, John Kenneth Galbraith wrote the "trickle-down economics" that that David Stockman was referring to was previously known under the name "horse-and-sparrow theory", the idea that feeding a horse a huge amount of oats will result in some of the feed passing through for lucky sparrows to eat.^[29] Reagan administration officials including Michael Deaver wanted Stockman to be fired in response to his comments, but he was ultimately kept on in exchange for a private apology.^[30]

Usage

Economic analyses of the effects of lowering taxes on the wealthy

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.^[31]

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.^{[32][33][11][34]}

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.^[35][36]

Political scientists Brainard Guy Peters and Maximilian Lennart Nagel in 2020 described the 'trickle down' description of tax cuts for the wealthy and corporations stimulating economic growth that helps the less affluent as a "zombie idea", and stated that it has been the most enduring failed policy idea in American politics.^[37]

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".^[38][39]

Broader use

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,^[40] and separately William Baumol,^[41] 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.^[42]

Despite a lack of practical-use evidence for the Laffer curve, it is often cited by proponents of trickle-down policy.^[43][9]

In the US, Republican tax plans and policies are often labeled "trickle-down economics", including the Reagan tax cuts, the Bush tax cuts and the Tax Cuts and Jobs Act of 2017.^[44] 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,^[45] 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.^[46] Similarly, the Tax Cuts and Jobs Act of 2017 cut taxes across all income brackets, but especially favored the wealthy.^[47][48]

In the 1992 presidential election, independent candidate Ross Perot also referred to trickle-down economics as "political voodoo".^[49] 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.^[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]

Nobel laureate Paul Krugman states that despite the narrative of trickle-down style tax cuts, the effective tax rate of the top 1% of earners has failed to change very much.^[59]

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.^[60]

Kansas governor and politician Sam Brownback's 2018 tax cut package was widely labelled as an attempt at trickle-down economics.^[61]

Friedrich Hayek's economic theories have also been described as trickle-down.^[62][63]

Objections to the term

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."^[64]

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.^[65]

Sowell has also written extensively on supply-side economics and opposes its characterization firmly, citing that it 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."^[66][67]

In 2022, the Liz Truss administration objected to characterizing its policies as "trickle-down economics".^[68]

See also

• Reaganomics
• Thatcherism
• Laffer curve
• A rising tide lifts all boats
• Trussonomics
• Austerity (21st century economic meaning)
• Classical economics
• Economic inequality
• Keynesian economics
• Matthew effect
• Neoclassical economics
• Neoliberalism
• Palace economy
• Progressive tax

References

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Further reading

• Aghion, Philippe; Bolton, Patrick (1997). "A Theory of Trickle-Down Growth and Development". The Review of Economic Studies. The Review of Economic Studies Ltd. 64 (2): 151–72. doi:10.2307/2971707. JSTOR 2971707.
• Gerald Marvin Meier, Joseph E. Stiglitz (2001) Frontiers of Development Economics: The Future in Perspective p. 422.
• Karla Hoff and Joseph E. Stiglitz (1998) Adverse Selection and Institutional Adaptation – Department of Economics Working Paper Series/University of Maryland, College Park, Dept. of Economics; no. 98–102.
• Hope, David; Limberg, Julian (April 2022). "The economic consequences of major tax cuts for the rich". Socio-Economic Review. 20 (2): 539–559. doi:10.1093/ser/mwab061.
• Randy P. Albelda, June Lapidus, Elaine McCrate and Edwin Melendez (1988). Mink Coats Don't Trickle Down: The Economic Attack on Women and People of Color. ISBN 0-89608-328-4.
• “Reaganomics: A Watershed Moment,Reaganomics A Watershed Moment on the Road to Trumpism.pdf," The Economists’ Voice, 2019, 16: 1.

External links

 

Wikiquote has quotations related to Trickle-down economics.

• John Miller. "Ronald Reagan's Legacy".
• Frank, Robert (April 12, 2007). "In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up". The New York Times. Retrieved March 5, 2008.
• "Trickle-down economics is the greatest broken promise of our lifetime" (January 20, 2014). The Guardian.
• "The 'trickle down theory' is dead wrong" (June 15, 2015). CNNMoney.