Trickle-down economics, also referred to as trickle-down theory, is an economic theory that advocates reducing taxes on businesses and the wealthy in society as a means to stimulate business investment in the short term and benefit society at large in the long term. It is a form of laissez-faire capitalism in general and more specifically supply-side economics. Whereas general supply-side theory favors lowering taxes overall, trickle-down theory more specifically targets taxes on the upper end of the economic spectrum.
The term "trickle-down" originated as a joke by humorist Will Rogers and today is often used to criticize economic policies which favor the wealthy or privileged while being framed as good for the average citizen. In recent history, it has been used by critics of supply-side economic policies, such as "Reaganomics". David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "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.
Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy. Multiple studies have found a correlation between trickle-down economics and reduced growth. Trickle-down economics has been widely criticised particularly by left-wing (socialist and social liberal) and moderate politicians and economists, but also some right-wing (conservatism) politicians.
Video Trickle-down economics
History and usage
In 1896, Democratic presidential candidate William Jennings Bryan described the concept using the metaphor of a "leak" 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.
Humorist Will Rogers jokingly advised in a column in 1932:
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 fellows hands. They saved the big banks, but the little ones went up the flue.
William J. Bennett wrote:
Humorist 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.
Presidential speech writer Samuel Rosenman wrote:
The philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.
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 while the first known use of "trickle-down theory" was in 1954.
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".
Speaking on the Senate floor in 1992, Senator 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".
Economist Thomas Sowell has written extensively on trickle-down economics and loathes its characterization, 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".
Maps Trickle-down economics
Criticisms
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", 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 claimed that the horse and sparrow theory was partly to blame for the Panic of 1896. In the 1992 presidential election, independent candidate Ross Perot called trickle-down economics "political voodoo". 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.
In New Zealand, Labour Party Member of Parliament Damien O'Connor has called trickle-down economics "the rich pissing on the poor" in the Labour Party campaign launch video for the 2011 general election.
A 2012 study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but it instead tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy.
In 2013, Pope Francis referred to trickle-down theories (plural) 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.
A 2015 paper by researchers for 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.
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".
In the 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.
See also
- A rising tide lifts all boats
- Austerity (21st century economic meaning)
- Economic inequality
- Keynesian economics
- Laffer curve
- Matthew effect
- Neoliberalism
- Palace economy
- Progressive tax
- Supply-side economics
- Trickle-up effect
References
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.
- 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.
External links
- 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". 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.
Source of article : Wikipedia
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