"Trickle-down economics" and the "trickle-down theory" are terms in United States politics
to refer to the idea that tax breaks or other economic benefits provided to businesses and
upper income levels will benefit poorer members of society by improving the economy as a whole.
The term has been attributed to humorist Will Rogers, who said of the New Deal that "money
was all appropriated for the top in hopes that it would trickle down to the needy."
Today, "trickle-down economics" is most closely identified with the economic policies known
as "Reaganomics" or laissez-faire. David Stockman, who as Reagan's budget director championed
these cuts at first but then became skeptical 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."
Context Economist Thomas Sowell has written 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. Sowell further has made the case that
no economist has ever advocated a "trickle-down" theory of economics, which is rather a misnomer
attributed to certain economic ideas by political critics who either willfully distort or misunderstand
the actual stated goals of their political opponents.
Although the term "trickle down" is mainly political and does not denote a specific economic
theory, some economic theories reflect the meaning of this pejorative. 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. Policies, including
tax cuts, that seek to increase saving are often aimed at the wealthy for this reason.
Saving usually means some form of investment, as even money placed in savings accounts is
ultimately invested by the banks. In the early 1990s Congressional Records,
non-pejorative uses of the term are rare but do appear.
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." 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. Proponents of Keynesian economics and related
theories often criticize tax rate cuts for the wealthy as being "trickle down," arguing
tax cuts directly targeting those with less income would be more economically stimulative.
Keynesians generally argue for broad fiscal policies that are directed across the entire
economy, not toward one specific group. In his 1919 address to Congress, Woodrow Wilson
warned that, at some point, “high rates of income and profits taxes discourage energy,
remove the incentive to new enterprise, encourage extravagant expenditures, and produce industrial
stagnation with consequent unemployment and other attendant evils.”
In a 1962 address to Congress, John F. Kennedy said, “it is a paradoxical truth that tax
rates are too high today and tax revenues are too low and the soundest way to raise
the revenues in the long run is to cut the rates now.”
This was not a new idea. John Maynard Keynes said, back in 1933, that “taxation may be
so high as to defeat its object,” that in the long run, a reduction of the tax rate
“will run a better chance, than an increase, of balancing the budget.”
In the 1992 presidential election, Independent candidate Ross Perot called trickle-down economics
"political voodoo." 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". 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. Professor Ha-Joon Chang at the University
of Cambridge has criticised the policies of trickle down advocates in several publications,
citing examples of slowing growth in the last few decades, rising income inequality in most
rich nations, and the effectiveness of welfare provision in raising living standards across
all income brackets rather than at the top only.
Theory explaining wealth condensation in the hands of rich is called Matthew Effect.
History and usage of the term 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.
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, 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." Speaking on the Senate floor in 1992, Sen.
Hank Brown 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."
Thomas Sowell claimed that, despite its political prominence, no trickle-down theory has ever
existed among economists. In response, many critics referred him to Stockman's remarks
to Greider. Sowell replied in his newspaper columns. Stockman himself had not proposed
or advocated the alleged theory, so Sowell rejected him as an example of someone who
had done so. Additionally, Stockman had not specifically named anyone who, or quoted a
source that, advocated the theory although he did claim that the theory was being adhered
to by the Reagan administration. Sowell replied 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.'"
See also A rising tide lifts all boats
Economic inequality Keynesian economics
Laffer curve Neoliberalism
Progressive tax Supply-side economics
Trickle up effect S corporation
Matthew Effect References
Further reading Aghion, Philippe; Bolton, Patrick. "A Theory
of Trickle-Down Growth and Development". Review of Economic Studies 64: 151–172. doi:10.2307/2971707.
JSTOR 2971707. Gerald Marvin Meier, Joseph E. Stiglitz Frontiers
of Development Economics: The Future in Perspective p. 422
Karla Hoff and Joseph E. Stiglitz Adverse Selection and Institutional Adaptation - Department
of Economics Working Paper Series / University of Maryland, College Park, Dept. of Economics ;
no. 98-02 Randy P. Albelda, June Lapidus, Elaine McCrate,
Edwin Melendez Mink Coats Don't Trickle Down: The Economic Attack on Women and People of
Color ISBN 0-89608-328-4 External links
Ronald Reagan's Legacy Frank, Robert. "In the Real World of Work
and Wages, Trickle-Down Theories Don’t Hold Up". New York Times. Retrieved 2008-03-05.